- in European Union
A key trade-facilitating grandfathering clause under EU rules will expire on 17 January 2027. Third-country CSDs such as DTC may then suspend core services to affected EU issuers, potentially disrupting trading in their equity or debt instruments abroad.
Third-country CSDs and the grandfathering clause
Central securities depositories (CSDs) enable issuers to have their equity and/or debt securities deposited with a central facility and traded in dematerialised (book-entry) form. In the European Union, CSDs are regulated by the CSD Regulation (CSDR). The CSDR primarily governs the operation of CSDs located in the EU but also imposes certain requirements on CSDs operating from outside the EU (so-called third-country CSDs).
Many Dutch and other European issuers have issued equity and/or debt securities that are traded on capital markets outside the EU and they rely on the services of third-country CSDs for this. Notably, European issuers with securities listed on a US exchange or otherwise traded in the US rely on CSD services provided by the Depository Trust Company (DTC).
Due to the expiry of a "grandfathering" clause under the CSDR as of 17 January 2027, DTC and other third-country CSDs will no longer be permitted to provide certain core CSD services in relation ato securities of European issuers without recognition from the European Securities and Markets Authority (ESMA).alevant stakeholders and encourage affected issuers to do the same.
What third-country CSDs now need to do to continue their services beyond 17 January 2027
As of 17 January 2027, all third-country CSDs will require ESMA recognition to be permitted to provide core CSD services to European issuers. Such recognition is conditional on the European Commission first having adopted an equivalence decision in respect of the relevant third-country jurisdiction. To date, the Commission has only adopted a temporary equivalence decision in respect of the United Kingdom that has by now expired, but not in respect of any other jurisdiction, including the US.
We understand discussions are ongoing between the European Commission, ESMA and DTC about a US equivalence decision and subsequent recognition of DTC. However, to date, no concrete steps in this direction have been made public.
Securities that are affected
The expiry of the grandfathering clause will affect all equity securities and debt securities (irrespective of their governing law) issued by European issuers in respect of which a third-country CSD provides core CSD services. This includes all equity and debt securities of European issuers that are deposited (first recorded in book-entry form) with DTC.
American Depositary Receipts (ADRs) issued in respect of European issuers’ equity securities are not expected to be affected. This is because ADRs are technically issued by US depositary banks and not governed by the laws of any EU member state − they therefore do not fall under the CSDR.
What happens if no action is taken before 17 January 2027
The practical consequences of the grandfathering clause expiring without a solution in place could be far-reaching. Non-compliance with the CSDR may give rise to administrative sanctions against both the relevant third-country CSDs and the European issuers concerned. Under the current circumstances, however, we believe enforcement action against European issuers is unlikely.
More critically, faced with uncertainty about the legal consequences of continuing to provide core CSD services without the requisite ESMA recognition, third-country CSDs may decide to suspend their services in relation to affected securities and remove these from their systems, thereby triggering a suspension of trading. Even for issuers whose securities are held entirely through third-country CSDs and only indirectly through European settlement systems, trading on European markets could be affected. As to debt securities, there may be additional risks depending on their underlying terms and conditions and it is advisable to review these terms carefully on a case-by-case basis.
Next steps
Several efforts are underway to address the upcoming expiry of the grandfathering clause in the CSDR.
First, as part of a new proposal for EU regulatory reforms to financial markets regulations, the European Commission has proposed amendments to the CSDR that would, among other things, extend the grandfathering period by three more years. The European Council has called on the co-legislatures to conclude negotiations on these reforms by the end of 2026, which have been identified as a priority deliverable. Discussions at Council Working Party level have shown broad support among EU member states for extending the grandfathering period for third-country CSDs.
A further element of the European Commission’s proposal is to exclude non-EU law-governed debt securities from the scope of instruments that third-country CSDs would require ESMA recognition for. Given the broad scope of the proposed reforms and the proximity of the 17 January 2027 deadline, there is a significant risk that the legislative process will not be completed in time.
In parallel, alternative short-term solutions are being pursued through two tracks: (i) a market signal (preferably from ESMA) that enforcement actions will not be taken pending new legislative proposals; and (ii) ongoing engagement with affected third-country CSDs, most prominently DTC, to prevent disruptive consequences.
Long-term solutions would include an equivalence decision from the European Commission in respect of jurisdictions where affected third-country CSDs are located (most prominently, the US) or more extensive revisions to limit the scope of the CSDR. More extensive regulatory reform of the CSDR will require legislative processes that will take several years or more to complete.
Since the matter directly affects many European issuers, we expect that the relevant path towards a (temporary) solution to protect their interests will become clear ahead of January 2027. We are in close contact with the relevant stakeholders through various channels to emphasise the importance of this issue and the need for a swift resolution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]
