CSDs Between the past and the future

Financial Market infrastructure entities (FMIs) like central securities depositories (CSDs) are at the core of the financial system and critical for financial stability. CSDs are essential for the proper functioning and security of financial instrument markets. They play a key role in maintaining the integrity of securities issues from fraud and loss. They provide three core services notary services, central securities accounts maintenance services, and security settlement systems. In addition to auxiliary services such as supporting the processing of corporate actions, tripartite collateral management, the organization of a securities lending mechanism between its participants, services to issuers.

The CSDs are also active participants in the integration of financial markets by establishing links between CSDs as a way for participants in a given market to be able to access securities issued in other jurisdictions. In the second annual survey of the World Forum of CSDs (WFC) which is composed of the five regional Central Securities Depositories (CSD) associations, i.e., Asia- Pacific CSD Group (ACG), Americas’ Central Securities Depositories Association (ACSDA), Association of Eurasian Central Securities Depositories (AECSD), Africa & Middle East Depositories Association (AMEDA) and European Central Securities Depositories Association (ECSDA), in their Fact Book dated 2019, it cited that from the 100 CSDs responded to the survey, 56 CSDs mentioned that they have links with other CSDs. Those links to make cross-border trade and settlement and to create full interoperability between different domestic systems and to access systems outside the domestic market with respect to each party regulatory requirements and multiple legal regimes which are considered from the beginning in their memorandum of understanding and conventions.

Recent technological innovation has made this integration process realistic as countries continue to adopt international standards and conventions (International Securities Identification Number (ISIN) standards or Bank Identification Codes (BIC)), and have considerably increased investments in straight through processing (STP) solutions (SWIFT or FIX (Financial Information eXchange) protocols).

Because of the central role central securities depositories play, it is important that the intermediaries be structurally, financially and operationally sound. This requires proper supervision by the public sector, an adequate capital base, rigorous risk management tools and business recovery plans. CSDs can vastly improve the efficiency, transparency, and safety of financial systems but also concentrate systemic risk. If not properly managed, they can be sources of financial shocks, such as liquidity dislocations and credit losses, or a major channel through which shocks are transmitted across domestic and international financial markets.

CSDs Traditional vs Disruptive business model

The world of finance is evolving drastically. CSDs are required to find opportunities to grow and to have an effective impact on the market, start providing services beyond their conventional area of business, and seek to meet the expectations of their clients and regulators. Diversification is affecting financial metrics and service level, cost management, market needs, and the regulator’s mission to ensure evolution of the domestic market are among the crucial drivers of diversification. They need to ensure global integration, attract foreign investors, or provide more opportunities to local investors. They must seek to disrupt their current business model. Previously, it took them more than a decade to conduct the dematerialization of share certificates from physical state. Some of them were the monopolist of this industry relying on their current legislation. They had the time needed to invest and cope with technological changes and their repercussions to offer sustainable services to all stakeholders.

In this era, technological innovation and digitization will be both challenges and opportunities for CSDs. Regulators and the infrastructure should maintain their competitiveness, including in front of FinTech businesses. Many competitors are facing CSDs and are creating a parallel financial market infrastructure using the internet of value. Fintech technologies like blockchain, Distributed Ledger Technology and tools like tokenization which are based on these new technologies are the next step in the evolution of the way securities are cleared, settled.

In the European Union T+1 Industry Committee summit held in Brussels, 3 July 2025, the committee presented its high-level roadmap to guide market participants through the transition to a shorter securities settlement cycle, scheduled for implementation on 11 October 2027. It reflects their commitment towards innovation and aligning European markets with global best practices to attract international investors.

The technological improvements needed to the core functions of traditional CSDs

All the functions - settlement, registration, custody, and asset servicing- performed by a CSD in a transaction can now be performed using blockchain technology. And the aspect of blockchain technology that underpins these functions is the digitalization of securities, or tokenization. To remain relevant in this new era of finance, CSDs need to adapt to tokenization of securities. (Tokenization simply refers to the digitalization of securities. The ownership of the security is associated with a digital token on a distributed ledger, and the ownership can only be transferred with the transfer of the token, and vice-versa.)

Tokenization is the next step in the evolution of securities are cleared and settled. The transparent nature of the distributed ledger technology (DLT), which powers DeFi (Decentralized Finance) and tokenization, ensures that transactions can be traded, cleared and settled directly between a buyer and seller. This facilitation of peer-to-peer transactions, without an intermediary to facilitate the exchange. The exchange is facilitated in real time, in the internet of value without the use of legacy technology that relied on SWIFT messages.

The most impactful Fintech-led innovation on CSDs:

1. Digital cash.

   
   

2. Blockchain technology, a distributed ledger technology (DLT) that maintains records on a network of computers, but has no central ledger.

   
   

3. Smart contracts, which utilize computer programs (often utilizing the blockchain) to automatically execute contracts between buyers and sellers.

   
   

4. Open banking, a concept that leans on the blockchain and posits that third-parties should have access to bank data to build applications that create a connected network of financial institutions and third-party providers.

   
   

5. Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.

   
   

6. Cybersecurity, given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.

Given the complexity of CSDs’ industry though come the need for qualified arbitrator

Central Securities Depositories (CSDs) stand at the heart of securities settlement and custody. They safeguard trillions of dollars in assets, ensure ownership is properly recorded, and facilitate the smooth functioning of settlement systems. Yet, their central role also means that when disputes arise -over settlement failures, operational outages, cross-border custody, or regulatory compliance- the consequences can ripple far beyond a single institution.

The global financial crisis of 2008 brought a wave of claims by and against financial institutions, regulators as well as among financial institutions. The grounds for these claims ranged from debt recovery and foreclosure actions over collateral to claims by borrowers and their shareholders against financial institutions on negligence grounds and claims alleging breach of the lenders’ and financial advisors’ duty of care. This crisis have led financial institutions to view international arbitration as an important alternative to litigation due to the nature of the financial disputes and the complexity of the regulatory environment.

The need of qualified arbitrator in the subject-matter expertise is critical, not optional due to the complexity of CSDs related cases. The banking and finance sector involves transactions that are not agreeable to a “one size fits all” approach.

Central Securities Depositories may operate behind the scenes, but they are indispensable to the functioning of modern capital markets. The disputes that arise in this space are complex, technical, and high-stakes. Arbitration offers the best path to swift and effective resolution—but only if arbitrators themselves are fully qualified to handle the intricacies of the field related to operations, services, financial instruments, compliance, technology, governance and jurisdictions .

As markets continue to evolve, the need for specialized arbitrators who combine legal acumen, market expertise, and regulatory knowledge will only grow. Ensuring the right expertise at the arbitration table is not just good practice, it is essential for safeguarding market stability and investor confidence. Authored By: Riham Hussein Anis, Executive Director at Misr for Central Clearing, Depository and Registry/ Planning & Project Management Department

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