Asset Segregation Rules for Central Securities Depositories: Maximizing Investor Protection While Ensuring a Level Playing Field

Abstract

This article provides an analysis of the various assets segregation requirements that central securities depositories (CSDs) need to adhere to. Omnibus segregation is likely to be preferred over individual client segregation in those jurisdictions where the legal rights of investors are equivalent regardless of the level of segregation. Individual client segregation could be chosen more often in jurisdictions where ultimate investor accounts are needed to determine the legal owner of the securities. Taking into account that individual client segregation is expected to be costlier and that CSDs are likely to reflect these costs in the settlement fees charged to their customers in order to stay profitable, CSDs located in member states with a higher likelihood that individual client segregation is chosen, are likely to face a competitive disadvantage vis-a-vis CSDs domiciled in a jurisdiction where omnibus segregation is deemed protective. The CSD-Regulation and Target2-securities have the harmonization of European settlement rules and practices as a goal, but a true level playing field between CSDs may only arrive when national securities (property) laws would be further harmonized or conflict-of-law rules would be made more effective. This article further explains the competitive challenges regarding asset segregation between CSDs and global custodians. Also, this paper describes the wish of CSDs to be exempted from certain asset segregation rules while global custodians require CSDs to be submitted to the same asset segregation rules to which they need to adhere to. A level playing field between these two different actors, which are currently offering similar services, may be obtained when they would be subject to the same legal requirements.