Opinion of the European Central Bank of 28 October 2005 at the request of the French Financial Markets Authority on draft amendments to its General Regulation (CON/2005/40)

OPINION OF THE EUROPEAN CENTRAL BANK of 28 October 2005 at the request of the French Financial Markets Authority on draft amendments to its General Regulation (CON/2005/40)

1. On 22 September 2005 the European Central Bank (ECB) received a request from the Autorité des marchés financiers (AMF) (French Financial Markets Authority) for an opinion on draft amendments to its Règlement Général (General Regulation) (hereinafter the ‘draft amendments’). The draft amendments will simplify the rules applicable to the transfer of ownership of financial instruments admitted to the operations of a central depository or settled through a settlement system.

2. The ECB’s competence to deliver an opinion is based on the fifth and sixth indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft amendments relate to payment and settlement systems and rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

3. The ECB was consulted in 2004 by the French Ministry of Economic Affairs, Finance and Industry on a draft order which contained certain draft amendments to Articles L.431-2 and L.431- 3 of the Monetary and Financial Code (hereinafter the ‘Code’) concerning rules on the transfer of ownership of financial instruments . Article L.431-2 of the Code provides as a principle that ‘the transfer of ownership of financial instruments … occurs on its entry in the purchaser’s account, on the date and subject to the conditions defined by the General Regulation of the AMF’. The draft 4 5 amendments , on which the ECB is now consulted, will define such conditions .

4. The ECB notes that, under the draft amendments, the entry in the purchaser’s account will take place on the date of the actual finalisation of the trade, as indicated in the rules governing the functioning of the settlement and delivery system, when the account of the purchaser’s custodian or of the custodian’s agent is credited on the books of the central depository . The ECB understands that, with the exception of certain situations expressly provided for in the General Regulation , the date of the finalisation of the trade and, simultaneously, of the entry in the account will be three trading days following the date of execution of the orders. 5. As mentioned in its previous opinion, the ECB welcomes the French authorities’ aim of simplifying the existing transfer of ownership regimes for financial instruments and the abolition of the distinction between transactions on and outside regulated markets thus avoiding a potential source of distortion. It is fundamental to the creation and functioning of a safe, efficient and integrated EU clearing and settlement infrastructure to have clear and harmonised rules on transfer of ownership, and in particular concerning the moment of transfer of financial instruments held with central securities depositories. Against this background, the ECB welcomes the fact that the draft amendments will further clarify the applicable rules in this field. In this respect, the ECB fully shares the view of the European Commission, which has identified the rules regarding the transfer of ownership of financial instruments as one of the core legal issues to be addressed by the newly established Legal Certainty group .

6. The ECB notes that the objective of the French reform is to ‘align systems of settlement of financial instruments with international standards’ and ‘to define a single regime for the transfer of property … by providing that the transfer of property takes place at the time of finalisation of the operations, i.e. in practice three days after the trade’ . The rules laid down in the draft amendments are in line with the draft standards proposed by the European System of Central Banks (ESCB) and the Committee of European Securities Regulators (CESR), which retain T+3 settlement as the current European ‘minimum standard’, implying that final settlement should occur no later than T+3 .

7. According to the draft Article 560-5 of the General Regulation, the rules governing the functioning of a market or a multilateral trading facility may provide that, for certain types of transactions, the date on which entries are to be made in the purchasers’ accounts is ‘other than three trading days following the transaction date’. The ECB understands that this provision is intended to cover settlement cycles shorter than three trading days. The ECB notes however that, as currently drafted, Article 560-5 could also cover settlement cycles longer than three trading days. It is noted in this respect that the draft ESCB/CESR standards recommend further harmonisation of settlement cycles across markets in order to reduce fragmentation of the EU securities markets, and an evaluation of whether a settlement cycle shorter than T+3 is appropriate for certain securities. The ECB therefore suggests amending the above provision to state that the rules governing the functioning of a market or a multilateral trading facility may provide that, for certain types of transactions, the date on which entries are to be made in the purchasers’ accounts is ‘less than three trading days following the transaction date’. 8. This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 28 October 2005. [signed] The President of the ECB Jean-Claude TRICHET