Central Securities Depository
The Role of a CSD
A Central Securities Depository (CSD) is a specialist financial organization holding securities such as shares either in certificated or uncertificated (dematerialized) form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. This allows brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. This is usually done electronically making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed.
CSD stands for “Central Securities Depository”. A CSD is an entity which provides a central point for depositing financial instruments (“securities”), for example bonds and shares. CSDs’ clients are typically financial institutions themselves (such as custodian banks and brokers) rather than individual investors.
1. Operates a securities settlement system (“settlement service”);
2. Records newly issued securities in a book-entry system (“notary service”);
3. Provides and maintains securities accounts at the top tier level (“central maintenance service”).
CSDs were historically set up by, or under the auspices of, national financial authorities such as the central bank or the Ministry of Finance.
Among privately owned CSDs, there are different ownership and governance models. Some CSDs are part of a corporate group including a Stock Exchange and/or a CCP, while others operate separately from the trading and clearing infrastructures.
CCPs or central clearing counterparties intervene between the trading layer (on the stock exchange, another trading platform or OTC) and the settlement layer. CSDs, intervene at the final layer when ownership of the securities is transferred. CSDs are primarily concerned with operational risk.
Banks, are referred to as “financial intermediaries”. They perform a wide variety of functions in the retail and wholesale markets such as taking deposits from the public, granting credit to individuals and companies, offering investor advice etc.
CSDs, are financial market infrastructures performing key functions for the whole market and primarily have intermediaries as their clients.
CSDs offer settlement and safekeeping services for different types of financial instruments. These include money market instruments (treasury bills, commercial paper…), bonds (corporate and government), equities (shares in listed companies), and many other instruments depending on the markets.
CSDs have proven highly resilient during periods of market stress, including the 2008 financial crisis which followed the collapse of Lehman Brothers. Their role is to mitigate risks for market participants, thereby supporting financial stability. In times of crisis, CSDs ensure that higher transaction volumes can be processed seamlessly while handling the failure of major market participants so as to minimise the effects on other market players and on the system as a whole.
The 2008 financial crisis highlighted concerns over counterparty credit risk, and in particular credit derivative products traded OTC. CSDs, on the other hand, primarily service the cash markets and mostly deal with operational rather than credit risks. This is an important difference with CCPs. It explains why the G20 post-crisis reform agenda focuses on the central clearing of derivatives without mentioning CSDs.
DVP or DvP stands for delivery versus payment. It basically means that securities are delivered to a buyer when (and only when) the buyer sends a payment to the seller. In practice, CSDs offer DvP facilities to their clients so that the transfer of securities from the seller to the buyer only
Test your Knowledge
- 1. What does CSD stand for?
- 2. What core functions does a CSD perform?
- 3. Who Regulates a CSD
- 4. What does “DvP” stand for?
- 5. What does T stand for in T+0?