CSDs (Central Securities Depositories) started as entities designed to reduce risk in the market by centralising the holding of securities. Originally, a CSD’s core service was to provide safekeeping and custody of stocks, as securities were held in physical or certificated form which required it to maintain large vaults with sufficient controls in place to minimise the risk of loss or theft. As markets grew and developed, however, CSDs expanded the range of services to support the back-office activities derived from trading, such as the clearing and settlement of transactions.

The European obsession with competition and free market has arrived in the CSD space. It is an unfamiliar concept in this space and will bring with it both positives and negatives for CSDs. There will be a change in approach, of the philosophy of the CSDs and also of the services that they provide. These are entities that stood up resolutely in the recent financial turmoil, so it would appear obvious to argue that if it’s not broken, then why try to fix it?

There is a lot of change taking place in the CSD space right now. As a knock-on effect of the post-2007 financial crises, CSDs have been nominated as systemically important market infrastructures that have been subjected to new rules, regulations and principles that are aimed at improving the safety framework of such entities.

Euroclear, which operates CSDs (central securities depositories) in the UK and Ireland, Belgium, France, Netherlands, Finland and Sweden, has announced that the UK and Ireland CSDs will switch to a T+2 settlement cycle from the current T+3 cycle on 6 October 2014.

Broadly defined, operational risk is the risk that deficiencies in information systems or internal controls, human errors or management failures will lead to losses. Several internal and external factors can contribute to operational risk, including inadequate controls, personnel and management error, failure of third party providers, natural disasters, terrorism, pandemics and regional disasters.