The European Central Bank in tandem with the Committee on European Securities regulators is calling for public comment on the application of 19 standards designed to enhance the safety, soundness and efficiency of the securities market infrastructure.

The standards - based on the CPSS-IOSCO recommendations for securities settlement systems of November 2001 issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organisation of Securities Commissions (CPSS-IOSCO) in November 2001 - were initially drafted to address the activities of central counterparties (CCPs) and central securities depositories (CSDs).

However, the working group revising the standard notes that some of the major custodians have their own settlement infrastructure for their clients and networks of sub-custodians, allowing them to clear and settle transactions inhouse rather than having to forward them directly to the local or foreign clearing and settlement systems.

"Some of them have clearing and settlement activities comparable to those of national CSDs in terms of volume and value," says the group. "Consequently, the level of systemic risk triggered by the largest custodians may affect the entire financial market of the European Union."

The exension of oversight standards to major custodians has been discussed in the past, but this marks the first attempt to explicitly adapt the rules to cover custody activity.

The move is a blow to the efforts of a group of agent banks led by BNP and Citigroup and operating under the 'Fair & Clear' banner, which had been lobbying in Brussels for exemption from settlement regulations. They argue that to apply the same standards to banks that are not merged with central securities depositories - as is the case with Euroclear - would expose the industry to "unnecessary and unprecedented" regulatory costs.

Recognising the contentious nature of the proposals, the rulemakers have prepared a specific questionnaire on this issue, with a view to developing the most appropriate definition of "systemic importance" as applied to custody systems.

The working party says some standards also have relevance to share registrars, and providers of other securities services, such as trade confirmation and communication network services.

The regulatory agencies are also keen to explore the benefits and costs of mandating a move to EU-wide settlement cycles shorter than T+3.

"The group believes that the harmonisation of settlement cycles needs to be studied further," states the document. "If there is no market action within an appropriate time frame, public authorities should consider initiating a cost-benefit analysis."

The standards, once finalised, will be used as a regulatory tool by regulators and overseers and will be more binding than the original CPSS-IOSCO recommendations.