In November 2024, the European Central Securities Depositories Association (ECSDA), of which we are a member, organised a conference on current topics in the field of post-trade services, focusing on the activities of depositories and broader contexts of the EU capital market.
During the discussion on the EU Capital Markets Union and the market infrastructure agenda, it was noted that the European capital market is beginning to suffer from a lack of liquidity due to the low number of new securities issues. A representative of the European Commission (DG FISMA) sees potential to increase the number of issues through cooperation with issuers, supervisory authorities, and market infrastructures. Regarding the promotion of investment and investors, the situation could be improved by the availability of simple investment products that could be accessed even by investors without sufficient knowledge. On the other hand, there are businesses that have insufficient knowledge regarding the possibility of raising capital in places other than the bank. To enhance the efficiency of the EU capital market, it is necessary to develop all pillars of the Capital Market ecosystem. The European Commission aims to listen to the voices of corporate issuers, and considers simplifying the environment for IPOs as one of its proposals to support liquidity. The harmonisation of processes may also contribute to improving the efficiency of capital markets, but it is not the sole factor. While the necessary steps for enhancing capital market efficiency are known, it is also essential to accept the associated risks, as client protection remains highly complex. Efforts to increase the efficiency of capital markets are time-sensitive, as Europe is lagging behind the United States.
In the discussion, panel participants addressed the support for the Capital Markets Union (CMU) by central securities depositories, the core of which was launch of a unified securities settlement system – Target2-Securities (“T2S”). The central securities depositories have thus confirmed that they have been working intensively on harmonisation over the past ten years. According to the depositories, interoperability among depositories supported by harmonisation is a better solution for a consolidated market than the establishment of a single central depository. Moreover, significant consolidation has already taken place among central depositories. According to an ESMA report on cross-border settlement, the EU capital market remains far from integrated. Several depositories believe that natural integration through competition among depositories should be facilitated. Initiatives that should support the CMU include continuing work on harmonisation and removing barriers to cross-border securities holdings and trading. Some participants also highlighted the significant concentration in the EU post-trade sector, where 82% of assets are recorded in five national central securities depositories. However, the prevailing view is that concentration is not synonymous with consolidation.
The discussion also addressed the issue of unified supervision of central securities depositories. According to many participants, unified supervision is not a universal solution, as costs are also increased by inefficient cross-border supervision. Greater supervisory convergence is therefore necessary, although this remains a political issue. A good example of cross-border supervisory cooperation was the consolidation of the three Baltic depositories, where achieving a single set of rules and operational procedures within the consolidated depositories would not have been possible without cooperation of supervisory bodies. A decentralised supervisory model is currently necessary due to differences in domestic legislation.
The discussion also addressed the issue of unified supervision of central securities depositories. According to many participants, unified supervision is not a universal solution, as costs are also increased by inefficient cross-border supervision. Greater supervisory convergence is therefore necessary, although this remains a political issue. A good example of cross-border supervisory cooperation was the consolidation of the three Baltic depositories, where achieving a single set of rules and operational procedures within the consolidated depositories would not have been possible without cooperation of supervisory bodies. A decentralised supervisory model is currently necessary due to differences in domestic legislation.
In the discussion on new technologies, panel participants expressed the expectation that the new Distributed Ledger Technology (DLT) would have the greatest impact on the emergence of licensed DLT exchanges, which will serve as equivalents to traditional infrastructures. The European Central Bank (ECB) began experimenting with DLT two years ago in collaboration with market participants, driven by market demand. During the trial operation of the ECB’s DLT platform, the entire lifecycle of securities was processed. An interesting experience with DLT was shared by a representative of the Czech Central Depository, who noted that their DLT solution was launched on 18 November this year, and it can process shares, bonds, and UCITS. The Czech Depository’s goal is to tokenise physical securities and expand further into the adoption of DLT. To achieve this, true added value is necessary. They also aim to incorporate new entities into the ecosystem that are not currently members of the depository.
During the panel discussion, participants noted that traditional clients of depositories are currently exploring how they can collaborate with DLT and what this technology might bring to them. While issuers may not yet see clear advantages of DLT, many are keen to be at the forefront of technological development. Even now, efficiency gains from DLT are becoming evident, particularly in the area of bonds. Participants emphasised the need for standardisation in the context of DLT usage. The role of central depositories remains irreplaceable even with the adoption of DLT technology, as the goal should be to create a reliable and secure market environment guaranteed by the depositories.
Regarding the vision for post-trade services by 2030, participants expressed the view that the impact of new technology (DLT) is beginning to be felt in depositories. Within 1.5 years, an increase in the regulation of crypto-assets is expected, which means that depositories should not adhere to current processes but should embrace the digital world. Another area requiring attention is reducing the lag of the EU capital market behind those in the United States and Asia. For instance, the US capital market is currently four times larger than Europe’s, and the seven largest global companies are domiciled in the US; Europe is unlikely to surpass this. The level of capital market costs in the EU is partly a result of the number of depositories in the EU (compared to the US, which has a single depository). Although depositories have worked hard on consolidation in recent years, they will never become a single depository but can strive for greater harmonisation. Currently, there is no political initiative aimed at harmonising tax laws and corporate law, as regulating only central depositories and brokers is insufficient in this respect. Central depositories are part of the post-trade domain, so changes in other areas are also necessary to prevent European companies from listing their securities outside of Europe.
The greatest hope for the future of depositories lies in new technologies such as tokenisation, DLT, cloud computing, and AI (atomic settlement). While these technologies may be disruptive or adaptive, it is essential for depositories to embrace their growth.
Author: Dagmar Kopuncová
