How has the regulatory environment surrounding your activities changed in recent years?
: If we take a step back and look at the development of legislation and regulations over a long period, we can see that the adoption of new measures accelerated significantly in the wake of the 2008 financial crisis. To prevent potential abuses in the financial sector, regulators have done a great deal of high-quality work to strengthen the ecosystem and protect investors.
However, not all the measures taken apply to a market infrastructure such as ours. However, we are directly affected by some of them, the most important being the Central Securities Depository Regulation (CSDR), which concerns the ecosystem of players involved in the settlement of financial instruments within the EU.
Can these regulatory measures, which are designed to prevent abuses, be seen as reminders of individual responsibility?
The perception of these regulations has not necessarily been associated with a feeling of failure. We, like most central depositories, have been diligent in our work and have continued to perform our role well. However, at the outset of the crisis, the regulators considered that there was a need to provide a better framework for activities, by clarifying roles and responsibilities, setting out a series of new procedures and requirements, and establishing control and supervision measures.
Against this backdrop, we have complied with the regulations in force, with the aim of contributing to the confidence that everyone places in the financial ecosystem.
In addition to the financial crisis of 2008, there is now a flood of regulations affecting financial activities, but not only financial activities. What does this mean for your teams?
It’s true that over the last few years we’ve seen a proliferation of regulations. The framework is constantly evolving. We can mention the regulation on capital requirements (CRR), measures to combat fraud and money laundering (AMLD), new obligations around the challenges of operational resilience (Dora) and others linked to corporate social and environmental responsibility. The subjects are varied.
Regulation is helping to reshape our business. In the near future, for example, it could force us to carry out European settlement and delivery operations within one day, compared with two at present. While we already operate a real-time settlement platform, other developments require players like us to make a considerable financial and human effort to comply with the new obligations. The first challenge is to fully understand the regulators’ objectives and expectations, and then put in place the most appropriate framework to meet them. In addition to European regulations, there are also national market requirements, which often tend to add to the complexity of the regulatory environment.
How do you deal with such a wide range of issues and requirements?
We need to work at a number of different levels to anticipate future developments and ensure that our activities remain compliant over time. To do this, we have a team working on regulations that are still under discussion, to assess their potential impact so that we can be sure of being compliant on the day they come into force. By anticipating developments and identifying trends, we can be better prepared, but also take part in discussions and ensure that our voice is heard by decision-makers. One of the biggest risks for us is that new rules will be drawn up by authorities who do not always have a detailed and concrete view of operational reality.
On what aspects is it important to be heard by regulators?
To ensure that the various measures taken are consistent. In recent years, for example, we have seen distinct regulations overlap. This is particularly true of the Capital Requirements Regulation (CRR) and the Central Securities Depository Regulation. In such cases, we choose to align ourselves with the most stringent regulation. However, it is not impossible for two sets of regulations to have conflicting requirements. From one country to another, the transposition of provisions may vary. Given that we operate at an international level, in more than 60 countries around the world, it is essential that we are able to dialogue with the regulatory authorities, to take account of the reality on the ground, with a view to always meeting the objectives pursued by the regulations.
In Luxembourg, we are grateful to have a supervisory authority that is open to dialogue and works with the players on the ground. When faced with a regulation, there are always elements that leave room for interpretation. We need to be able to clarify them, through the publication of technical specifications or questions and answers. Beyond that, we need to be able to adapt our procedures, processes and information systems, and set up governance and new reporting systems to meet the new requirements. This requires a major coordination effort.
How has your role changed in light of the increasing number of regulations and requirements, and the associated risks?
It has been strengthened over the years. Today, it is essential if we are to ensure that our requirements are constantly being met. On the one hand, this is about protecting investors and issuers. On the other hand, we need to ensure that our authorisation to operate on the markets is preserved. From Clearstream’s point of view, regulations are essential and welcome insofar as they contribute to strengthening the financial industry and guaranteeing confidence between the various stakeholders in the ecosystem. We consider that the improvement of the framework, under the supervision of the supervisory authorities, is positive for the Luxembourg financial centre.
Many players regularly point to the constraints associated with these developments, complaining about the growing burden of regulation...
Yes, indeed, it is restrictive. It requires the mobilisation of considerable financial and human resources, both within Clearstream and across the entire financial ecosystem. The challenge here is to find the right balance to guarantee investor protection while ensuring that all resources are not allocated to this single issue, to the detriment of innovation or service quality. Our primary objective is to serve our customers, meet their needs and evolve with them. It is also important to ensure that the regulator is aware of the importance of this balance. As I was saying, we welcome these regulations, but we must ensure that they do not undermine competitiveness. If, on the scale of a group like ours, we are organised and in a position to dedicate the necessary budgets to these regulatory issues, it becomes complex for smaller players. The burden of regulation leads to a loss of competitiveness and sometimes to major consolidation.
In addition to European regulations, there are also national market requirements.
Do all regulations achieve their objectives?
First of all, it should be pointed out that the regulations do not apply to everyone in the same way. As a central securities depository, we do not serve individual clients directly. Regulations such as EMIR do not apply directly to our business. However, as a supervised entity, it is our responsibility at the very least to demonstrate how they do not apply to us and to document this. Some regulations, on the other hand, do not achieve the desired result, often due to a lack of precision or because, involving too many stakeholders, they prove difficult to implement.
On the other hand, there are some regulations that we very much welcome. In our view, regulations such as Dora are necessary and appropriate. Through a set of very precise measures, it not only harmonises the patchwork of existing regulations on information and communication technologies, but also strengthens the digital operational resilience of financial entities with a view to improving the overall resilience of the financial system. In this case, regulation clarifies many things and opens up opportunities for innovation. As such, it can create opportunities. It should not always be seen as a burden.
To what extent can technology help us respond more effectively to these regulatory challenges?
Innovation is an important part of our group, and goes beyond regulatory and legal issues. It is reflected in a number of important areas. These include digital securities technologies, such as blockchain, as alternatives to traditional settlement and delivery models. The use of artificial intelligence is also an important issue, particularly to improve data processing. Finally, migration to the cloud is another major issue. For our businesses, technological solutions are seen as tools that should enable us to meet our obligations more efficiently, support data processing and facilitate reporting. While it is possible to automate certain tasks and operations, and while tools can save us time, technology does not replace the human brain, which enables us to understand and interpret regulations, and which remains essential for guaranteeing compliance. On the other hand, the integration of new digital solutions, whether cloud or artificial intelligence, raises regulatory issues. It’s up to us to ensure that they are implemented in a way that complies with current requirements.
What does this mean, for example, in your dealings with cloud service providers?
Before selecting a partner, we need to obtain guarantees, particularly at contractual level, on a range of aspects. One of the major issues is preserving data confidentiality and locating it in Europe. With this in mind, we have contributed to an initiative aimed at bringing together different financial players to better assert our requirements and to have the possibility of carrying out audits in a collaborative format vis-à-vis these IT service providers. And, of course, all this is only possible with the approval of our regulators, with whom we maintain a transparent and ongoing dialogue.
In recent years, legislation on sustainable finance and corporate social and environmental responsibility has also developed considerably. How do these issues affect you?
These are also issues that we have to deal with. In terms of sustainable finance, there are a lot of regulations and the scope is quite broad. While banks that work with individual players are obliged to ask about their preferences in terms of sustainability, this is not a direct concern for us. When we talk about sustainability, we should also mention the new obligations relating to corporate social responsibility. Like many other players, we are required to report on our social and environmental impacts, as well as on our good governance practices.
This legislation requires us to produce a great deal of data. As the financial industry’s central infrastructure, aren’t there business opportunities in exploiting this information?
We don’t intend to position ourselves directly as a data provider. However, there are opportunities to organise information better, to analyse it better and to use it to meet our financial and regulatory obligations more effectively. All the data generated can be transformed using machine learning and AI, while at the same time strengthening our services to meet the specific needs of each of our customers.
Looking to the future, what are the major challenges ahead?
In recent months, there has been a lot of talk at European level about the need to strengthen the capital markets union, particularly following the reports by Enrico Letta and Mario Draghi. This is indeed a major challenge for supporting European growth and competitiveness, and we support it. A major obstacle to more cross-border investments and transactions is the legal and fiscal fragmentation that exists across the European Union. As a European and global market infrastructure, we have been working towards market integration for over 50 years. We believe that greater legal and fiscal harmonisation will contribute to greater integration, leading to more trade, more investment and smoother transactions. Our role, in this context, will continue to be to guarantee confidence, to facilitate these exchanges on the basis of higher added-value services.
This article was written in for the supplement supplement to the published on 23 October. The content is produced exclusively for the magazine. It is published on the website as part of the complete Paperjam archive. .
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