In December 2010, the Basel Committee on Banking supervision published the global regulatory framework on capital and liquidity, commonly known as Basel III, a set of standards aiming at strengthening the stability and resilience of the banking system building on the lessons learnt from the financial crisis in 2007/08. The first elements of the Basel III standards were introduced in European law by the Capital Requirements Regulation (EU) No 575/2013 (CRR) and the Capital Requirements Directive 2013/36/EU (CRD). While implementation of the requirements was largely completed already in 2018, specification and adjustment of selected requirements through the adoption of delegated and implementing acts as well as revision of existing requirements continues.

Financial market infrastructures (FMIs) in their role as Central Securities Depositories (CSDs) and Central Counterparties (CCPs), although different from credit and primarily regulated under the Central Securities Depositories Regulation (Regulation (EU) No 909/2014; CSDR) and European Market Infrastructure Regulation (Regulation (EU) No 648/2012; EMIR) respectively, are required to be authorized as credit institutions in order to be able to provide certain services and as such are additionally subject to certain CRD IV/CRR requirements.

CCPs are often required to obtain a banking licence to ensure access to overnight central bank facilities, which are essential to increase resilience and smooth operations. In contrast to this, CSDs need to be authorized as credit institutions to provide banking services that are ancillary to their main business such as the provision of cash accounts to, and accepting deposits from, participants in a securities settlement system and holders of securities account, primarily conducted to increase settlement efficiency. CSDR and EMIR restrict the business activities of CSDs and CCPs considerably to ensure limiting additional risks to the largest extend possible. As such, CSDs and CCPs with a banking license do not undertake any significant maturity transformation. Moreover, CSDR and EMIR as well as related regulations (e.g., the Securities Finality Directive, the CCP Recovery and Resolution) contain strict risk management rules and additional prudential and capital requirements, as well as recovery and resolution rules. Consequently, CSDs and CCPs are embedded in a comprehensive regulatory regime specially tailored to them as FMIs.

However, as the requirements in CRD IV/CRR also apply to CSDs and CCPs operating with a banking licence, they are placed on equal regulatory footing with credit institutions, even though they only provide bank-like ancillary services to a very limited extent and, due to the distinct nature of their business model, do not pose any long-term risks like credit institutions do. Therefore, in order to ensure that CSDs and CCPs remain able to provide their services properly and thus strengthen the stability and integrity of financial markets, which also contributes to the objectives of the European Commission’s initiative on the Capital Markets Union, the unique characteristics of FMIs should be recognised by granting exemptions from prudential requirements designed for credit institutions as per CRD /CRR.

Against the background of the recognition of the specific business models of CSDs and CCPs, certain exemptions have already been granted. The EU rules deviate in some aspects from the Basel III standards to take those specific activities and pass-through models considered formally banking activities into account. As such, CCPs as well as CSDs maintaining a banking license were exempted from the Net Stable Funding Ratio (NSFR) on an individual basis, as they do not perform any significant maturity transformation. The distinct business model of CCPs and CSDs was moreover reflected in exemptions from the Leverage Ratio (LR): While CSD’s cash balances resulting from the provision of banking type ancillary services used solely for the purpose of settling transaction in securities settlement systems were excluded from the LR exposure measure as they do not create a risk of excessive leverage, CCPs were fully exempted from applying the LR requirements. To avoid potentially undermining the provision of central clearing services by institutions to clients, the initial margin on centrally cleared transactions conducted by institutions for their clients has been excluded from the total exposure measure as well.

The distinct business model and role of FMIs having a banking license was further considered in the field of recovery and resolution planning. Due to classifying as credit institutions CCPs and CSDs having a banking license were subject to the general requirements of the Bank Recovery and Resolution Directive (Directive 2014/59/EU; BRRD) rather tailored for “classic” lending banks than for FMIs. With the publication of a dedicated framework for recovery and resolution for CCPs (Regulation (EU) 2021/23; CCP R&R) existing shortcoming in the field of recovery and resolution where addressed through exempting CCPs having a banking license from the BRRD. Consequently, the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) will no longer subject CCPs. which was considered potentially jeopardizing the efficiency of central clearing. Instead specific tailored requirements on pre-funded dedicated own resources will apply.

While the BRRD already early foresaw the possibility of separate recovery and resolution frameworks for CCPs and CSDs (see. Recital (12) BRRD to ensure consistency, only a dedicated framework for CCPs was developed so far. Since the same logic behind granting this exemption to CCPs also applies to CSDs regardless of a banking license, they should also be covered by a dedicated R&R framework exempting  CSDs with a banking license from the MREL requirement., particularly as CSDs are already as of today obliged under CSDR to hold sufficient capital ensuring an orderly winding-down or restructuring of the CSD’s activities.

Objective

The overarching goal of the rules is to strengthen the resilience and stability of the EU banking sector so it would be better placed to absorb economic shocks, while ensuring that banks continue to finance economic activity and growth.

Timeline

CRD IV/CRR are part of the regulatory package to transpose Basel III into European law and have been in force since January 1, 2014, albeit with longer transitional periods for some rules.

In 2020, the European Commission has carried out a rapid review of the CRR, introducing targeted amendments to facilitate bank lending against the background of the COVID-19 crisis.

The Commission intends to put forward a regulatory framework on bank capital requirements set out in CRD and CRR to conclude the ‘Basel III finalisation’. Originally scheduled for 2020, the Commission postponed the plans until 2021 in response to the COVID-19 pandemic.