Consultation on the review of the EU Directive 98/26/EC on settlement finality in payment and securities settlement systems
Earlier in February 2021, the European Commission published a targeted consultation on the review of EU Directive 98/26/EC on settlement finality in payment and securities settlement systems (SFD). The consultation is open for a few more days until 7 May 2021.
The SFD aims to reduce systemic risk arising from the insolvency of participants in payment and securities settlement systems, and as such is relevant to numerous payment market participants, including payment institutions (PIs) and e-money institutions (EMIs). The SFD regulates and protects designated securities settlement and payment systems and, among others, guarantees that transfer orders which enter into such systems within certain deadlines are also finally settled, regardless of whether the sending participant has become insolvent, or transfer orders have been revoked in the meantime.
Each EU member state is required under the SFD to specify (i) the national systems and the respective system operators which are to be included in the scope of the SFD (Article 10), and (ii) the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator (Article 6.2). The list of SFD designated systems by the EU member states is published centrally by the European Securities and Markets Authority (ESMA) and can be accessed here. The UK national systems and the respective system operators used to be on this list published by ESMA too, but are no longer due to Brexit, and they fall now under the category of systems governed by a law of third country. The names of the UK national systems, including those designated under the legislation in the UK which implemented the SFD, are published by the Bank of England and the list can be accessed here.
The consultation on the SFD covers 6 key topics, including (i) the participation in systems governed by a law of third country, (ii) the participation in systems governed by the law of an EU member state, (iii) SFD and technological innovation; (iv) protections granted vis-à-vis collateral security; (v) settlement finality under the SFD, and (vi) the interaction of the SFD with other EU Regulations/Directives. While all of these topics are important, we would like to draw particular attention to the topic of participation in systems (a) governed by the law of a third country and (b) governed by the law of an EU member state.
With respect to the participation in systems governed by the law of a third country, the EU Commission is requesting views in this consultation on whether the EU institutions that participate in third-country systems should be protected by the SFD? For example, should a French bank (i.e. an EU institution) who participates in the UK’s CHAPS system (i.e. third-country system) be protected under the SFD.
With respect to the participation in systems governed by the law of an EU member state, the EU Commission is requesting views on whether the list of currently eligible SFD participants should be either limited or extended or otherwise modified. As part of this topic, the EU Commission is more specifically requesting views on whether:
- the participation in the SFD system should be limited to legal persons (as opposed to legal persons and natural persons);
- the PIs should become participants, and if so under which conditions;
- the EMIs should become participants, and if so under which conditions;
- the operators of EU payment systems that are not designated under the SFD should become participants; and
- central securities depository should become participants.
The debate on the participation of PIs and EMIs in the payment systems generally is not a new one. The rules on access to payment systems (both those designated under the SFD and those which are not) were already set out in the PSD1, which was replaced then by the PSD2. This consultation, among others, also invites views of stakeholders on the interaction between the rules in the PSD2 and the SFD.
It is noteworthy that the PSD2 differentiates between (i) payment systems designated under the SFD and payment systems composed exclusively of PSPs belonging to a group, and (ii) other payment systems. The rules on access to these two types of payment systems are not the same. While the general access to payment system requirements applies to the latter, with respect to the payment systems designated under the SFD and those composed exclusively of PSPs belonging to a group, there is only a requirement that participants in these payment systems (as opposed to the payment system itself) should provide indirect access. This access must be provided in a proportionate, objective and non-discriminatory manner and must not restrict access more than necessary to safeguard against specific risks. PSD2 however does not impose an absolute obligation for participants to grant indirect access to all payment service providers (including EMIs and PIs) that request it. The decision to work with a given payment service provider is still a commercial one, with participants able to take into account cost and risk. This consultation will assess whether this indirect access is sufficient, or whether direct access should be provided to PIs and EMIs to SFD designated systems.
Currently, the SFD includes as direct participants, among others, credit institutions, investment firms, public authorities, Central Counter Parties (CCPs), system operators, but not PIs and EMIs. Furthermore, which makes things slightly more complex, the SFD has also given EU member states the option to decide that, for the purposes of the SFD, an ‘indirect participant’ may be considered a ‘participant’, if that is justified on the grounds of systemic risk and on the condition that the ‘indirect participant’ is known to the system.
At the EU level, in the absence of a harmonised SFD solution, the EU Commission noted that some EU member states have introduced national solutions that allow PIs and EMIs either direct or indirect participation in payment systems, provided they fulfil certain criteria. This situation has led to level playing field issues between EU member states, fragmentation of the European retail payment market and legal uncertainty regarding the cross-border recognition of settlement finality on SFD payment systems.
In view of the above-mentioned level playing field issues, the EU Commission announced already in its Retail Payment Strategy back in September 2020 that it would consider, in its SFD review, extending the scope of the SFD to include PIs and EMIs, subject to appropriate supervision and risk mitigation. This consultation follows up on this announcement and, depending on its outcome, it means that these categories of institutions, at the EU level, might become eligible to become direct participants in payment systems.
In the UK (excluding Northern Ireland), the SFD was transposed through the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. More recently, this regulation was amended by the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019/341. In particular the definition of “institution” in the regulation was expanded by including EMIs, PIs and small PIs. Through the above amendment, the United Kingdom already insured that, notwithstanding the insolvency of an EMI or PI, transfer orders which enter within certain deadlines into the designated systems under the above mentioned settlement finality regulations (listed here), and the EEA temporary designated systems (listed here), prior to the insolvency of that institution, will be finally settled. However, the consultation, and any follow up revision of the SFD, depending on its outcome may have an impact on the rules of participation of the UK EMIs and PIs in the EEA systems going forward.
DALIR is available to assist you if you have any questions with regards to this consultation or more generally on this topic. Please do not hesitate to contact us.