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Learn the basic principles of Central Securities Depositories

What is a CSD?

CSD stands for Central Securities Depository.

A CSD is a financial market infrastructure that provides in the safekeeping of securities such as shares and bonds.

The formal definition of a CSD is captured in the European Central Securities Depository Regulation and describes a CSD as a legal entity that operates securities settlement systems and provides related services

The main customers of a CSD are:

  • financial institutions
  • issuers of financial instruments, either private companies or public institutions.

CSD main activities

The European CSD Regulation (CSDR) provides more detail. It describes the main activities of a CSD as an entity which:

  • operates a securities settlement system
  • records newly-issued securities in a book entry system
  • provides and maintains securities accounts

See below for more on what these three activities involve.

Settlement covers the administration and financial processing of securities transactions. A transaction is 'settled' once the CSD has:

  • credited the account of the buyer with the purchased securities (and debited the corresponding cash amount)
  • debited the account of the seller with the securities (and credited its account with the corresponding cash amount).

CSDs operate IT platforms to facilitate the settlement of securities. Transfer of securities and payment takes place at the same time. This is called “Delivery versus Payment”.

A CSD is the first entry point to the securities markets for newly created securities. New securities, issued for example by a private company, are usually deposited into a single CSD. This CSD is called the “issuer CSD”. The issuer CSD is responsible for ensuring the integrity of the issue, i.e. that the number of securities created equals the total number of securities in circulation.

Once a transaction is settled, the rights and obligations linked to the ownership of the securities must be managed. Thus, CSDs process corporate actions such as dividend and interest payments, or voting rights in the case of shares.

The CSD is always at the top of the securities chain. This is what is meant by “top tier level”. All holdings in a given security, whether held by an individual or a financial institution, are ultimately kept in a securities account at the CSD.

An example:

A participant in a pension fund may hold shares in company X. The pension fund uses an investment broker to handle the transactions and administration for the investment fund. The shares held by our pension fund participant end up in the investment broker's account at the CSD.

What types of securities are managed by CSDs?

CSDs offer settlement and safekeeping services for different types of financial instruments.

Such financial instruments can be:

  • equities
  • bonds (corporate, government and supranational debt)
  • money market instruments (treasury bills, commercial paper, etc)
  • investment funds
  • and many others

Instruments issued, settled or safekept at a CSD can be traded on a trading venue (a regulated market or multilateral trading facility or organised trading facility). They can also be traded over the counter (OTC).

Why do we need CSDs?

The use of CSDs benefits the entire market. CSDs are the central point of reference for the market.

Once your buy or sell order is executed, the CSD settles your transaction using Delivery versus Payment. This reduces risks for both buyers and sellers. The CSD also manages the securities once the transfer of ownership has taken place.

CSD clients are mostly financial intermediaries like custodian banks or brokers. CSD clients must meet strict requirements like high creditworthiness and technical capability. This ensures the smooth processing of transactions, transfer of ownership and payments.

Without CSDs, individuals or firms would have to take responsibility for themselves when buying shares for:

  • identifying the seller
  • transferring the proceeds
  • ensuring they receive their securities

A CSD certifies that the number of securities in circulation is the same as the number of securities issued at any time.