Transcript Clearing and Settlement by Clearstream Banking Frankfurt

Interdepository Relations of Clearstream Banking
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International Conference Almaty 06 December, 2002
Agenda
• Brief overview of Clearstream and its core activities
• Why become interdepository relations more and more important?
• Overview of Clearstream’s CSD-links worldwide
• Legal pre-conditions
• Types of CSD-links
• Types of exchanged data
• Example: Interdepository relation between Clearstream and DTCC
• Current consolidation activities in Europe and models for the future
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Organisation Chart
Deutsche Börse AG
(DBAG)
Frankfurt am Main
Clearstream
International
(CI)
Luxembourg
Clearstream
Banking
Luxembourg
LuxClear
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Clearstream
Banking
Frankfurt
Clearstream
Services
Luxembourg
Clearstream
Properties
Luxembourg
Clearstream
Nominees
London
Clearstream
International
London
Branch
CSS
London
International Conference Almaty 06 December, 2002
Clearstream’s core activities
• Clearing and Settlement
• An intermediary role to ensure that transactions between financial institutions
for bonds and equities are completed efficiently and successfully;
• Custody
• Safe custody and management of customer securities held on deposit;
• Banking Services
• Provision of additional value added services to customers, for example,
securities lending and borrowing, collateral management, etc.
• Additional Services
• Operating Luxclear, the Central Securities Depository (CSD) for the Grand
Duchy of Luxembourg;
• Vestima, our innovative STP solution for Investment and fund processing.
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Clearstream International’s global presence
London
Frankfurt
Luxembourg
Hong Kong
New York
Dubai
São Paulo
• 2,500 customers in 94 countries
• 1,700 employees
• 42 nationalities
• 7 offices world-wide
• approx. 200,000 eligible securities
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Continuous growth
Custody volume
(in trillions of Euro)
Transactions
(millions)
+67%
-23 %
+25%
+71%
154
119
92
+47%
+15%
74
+19%
5.6
43
4.1
+18%
6.6
+8%
+6 %
7.1
7.5
2000
2001
4.7
29
199
6
199
7
199
8
199
9
2000
2001
market share in Europe
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1996
1997
1998
1999
approx. 35%
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Interdepository Relations:
Why are they necessary?
History
physical delivery of securities via train, ship, plane, etc.
• low safety levels
• low effectivity
• high costs
• setting up of electronical links
Development
Today
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• immobilisation (jumbo receipts)
• dematerialization (no printed securites)
Book entry
International Conference Almaty 06 December, 2002
Target structure of the
European securities industry
Market participants
Exchanges
(cash
markets)
ECNs,
crossingnetworks
Exchanges
(derivatives)
Off-exchange
Repos,
Swaps, FI
Integrated clearinghouse/
central counterparty
National
CSDs
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US settler
ICSDs
Trading
Clearing
(CCP / netting)
Settlement
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World Wide Network of
Clearstream International
CSC
CSD-LINKS:
• AEX-NECIGEF
• APK
• Iberclear
• BXS-CIK
• DTCC
• JSSC
• Monte Titoli
• OEKB
• SIS
• Euroclear France
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NCSC
World wide
sub-custodian
network and
ICSD-LINKS to:
• Euroclear
• CBL
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Custodian Links - Europe
Austria: Erste Bank d. oesterr. Spark.
Netherlands: KAS-Associatie, Necigef,
Belgium: Banque Bruxelles Lambert
Abn Amro
Czech Republic: Citibank
Norway: Den norske Bank
Denmark: Den Danske Bank
Poland: Citibank
Estonia: Eesti Uhispank
Portugal: Banco Santander de Negocios
Finland: Merita Bank
Sweden: Skandinaviska Enskilda
France: Banque Paribas
Switzerland: UBS
Greece: Citibank
Slovakia: CSOB
Hungary: Türkiye Is Bankasi
Spain: Banco Bilbao Vizcaya Argentaria
Ireland: Citibank
Turkey: Türkiye Is Bankasi
Italy: Bca. Commerciale, San Paolo
United Kingdom: Citibank, CrestCo
Luxembourg: Bqe. Internationale a
Luxembourg, Banque Paribas, Bqe.
de Lux., Chase Manhattan Bank,
Kredietbank, Credit Lyonnais
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International Conference Almaty 06 December, 2002
Custodian Links - Worldwide
Argentinia: Citibank
Malaysia: OCBC
Australia: ANZ
Mexico: Citibank
Canada: Bank of Nova Scotia
China / Shanghai: HSBC
New Zealand: Reserve Bank of
New Zealand
China / Shenzhen: HSBC
Singapore: OCBC
Hongkong: Citibank
South Korea: HSBC
Indonesia: Citibank
South Afrika: Standard Corporate
and Merchant Bank
Japan: Bank of Tokyo-Mitsubishi,
Industrial Bank of Japan, Sumitamo
Bank
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Thailand: Thai Farmers Bank
USA: Chase Manhattan, Citibank
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Pre-Conditions for the establishment of interdepository
relations between Clearstream and a foreign custodian
Three Point Declaration
To be signed by the foreign custodian:
•
Securities in securities-safekeeping account no. … belong the customers of
Clearstream
•
Assertion of any securities lien, right of retention or any similar rights only for such
claims as may arise from the purchase, administration and safe custody of these
securities, immediate information of Clearstream in case of any third party intervention
•
Securities are kept in safe custody at a place within the frontiers of the “ABC-Bank”, no
entrustment of a third party with the effective safe custody of such securities or transfer
to another country without Clearstream’s consent
In case of registered shares: Registration of a nominee (instead of the beneficial owner).
According to the legal situation in the respective country this can be Clearstream by itself
or another company (like DTC in the USA).
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Types of CSD-links
•
Indirect Link:
CBL has an account with a sub-custodian which has an account in its own name
with the CSD.
•
Semi-direct Link:
CBL has an account with a CSD in its own name, operated through a technical
account with an agent bank (sub-custodian)
•
Direct Link:
CBF / CBL has an account in its own name with a CSD
DvP or FoP
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CBL Current links – Indirect Link
Type of securities:
Outbound
Link
CSD
• CSD eligible securities
• Non-CSD eligible securities
Subcustodian A/C
Instructions
Confirmations
Number of accounts:
1 account at subcustodian
CSD Nostro A/C
Subcustodian
CBL Loro A/C
Confirmations:
File Transfer/S.W.I.F.T.
Instructions:
File Transfer/S.W.I.F.T.
Reconciliation
Subcustodian Nostro A/C
Subcustodian Nostro A/C
CBL
CBL
CBF Loro A/C
CBF A/C
Reconciliation
CBL Nostro A/C
CBL Nostro A/C
CBF
CBF
Clients A/Cs
Clients A/Cs
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CBL Current links – Semi-direct Link
Subcustodian A/C
Outbound
Link
Type of securities:
• CSD eligible securities
CSD
Reconciliation
• Non-CSD eligible securities
CBL Loro A/C
Instructions
Number of accounts:
Confirmations
• 1 account at the CSD
CSD Nostro Technical A/C
Agent Bank
(Subcustodian)
• 1 technical account at agent
bank
Confirmations:
File Transfer/S.W.I.F.T.
CBL Technical A/C
Instructions:
File Transfer/S.W.I.F.T.
Agent Bank Nostro A/C
CBL
Reconciliation
CBF Loro A/C
CBL Nostro A/C
CBF
Clients A/Cs
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CBF Current links –Direct Link
Outbound
Link
CSD
CBF Loro A/C
Reconciliation
Countries where
link exists:
• Belgium
Confirmations:
File Transfer/ S.W.I.F.T./
Proprietary
• Finland
• France
• Italy
Instructions:
File Transfer/ S.W.I.F.T./
Proprietary
• Netherlands
• Spain
Type of securities:
• Switzerland
• USA
CSD Nostro A/C
• CSD eligible
securities
CBF
Clients A/Cs
Number of accounts:
• 1 account at the
CSD
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The CSD Link CBF - DTCC
DTCC
The Depository Trust & Clearing Corporation (DTCC), is a holding company that oversees
two principal subsidiaries - The Depository Trust Company (DTC) and the National
Securities Clearing Corporation (NSCC) -. These two firms provide the primary
infrastructure for the clearance, settlement and custody of the vast majority of equity,
corporate debt and municipal bond transactions in the U.S.
• CSD link between CBF and DTCC, was established in 1992
• Bilateral link
• Free of payment
• About 250 securities are held within the link, in a Collective Safe Custody status
• Settlement of trades in these securities is processed through CASCADE system
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The Link Structure
USA
GERMANY
Depository Trust
and Clearing
Corporation
DTCC
Delivering
account
Clearstream Banking
Frankfurt
CBF
2000 CBF
account
7911 DTCC
account
Receiving
account
Filetransfer
Delivery of securities
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Credit of securities
International Conference Almaty 06 December, 2002
Examples
1. Customer A buys 100 Microsoft shares in Berlin; the counterparty is a CBF member. Clearing
and settlement takes place in CBF/CASCADE system.
2. Customer A sells 100 Microsoft shares in Nasdaq Europe; the counterparty has no clearing
and settlement arrangement with CBF. Clearing and settlement takes place between Creation,
Citibank N.Y. and the receiving counterparty‘ s U.S. custodian. Customer A must deliver 100
Microsoft shares FoP from Cascade to Creation.
3. DvP settlement can now take place between the customers CREATION account and the
receiving counterparty‘s custodian bank.
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Example 1:
Settlement of a trade executed in Berlin
• After end of trading, matched instructions are sent to XONTRO-trades.
• Instructions are processed.
• Contract notes (Schlussnoten) are sent to the counterparties; discrepancies have to be notified
in T+1, before beginning of trading.
• After trade enrichment contract notes (Schlussnoten) are sent to CASCADE/LION where
instructions are generated.
EXCHANGE
Seller
Buyer
XONTRO-Orders
Broker
Buy Order
Sell Order
Sell Confirmation
(Schlussnote)
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XONTRO-Trades
Buy Confirmation
(Schlussnote)
Instruction
Instruction
CASCADE
LION-Pending S/E
Transactions
Buyer account
+100
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Example 2:
Transfer of sec. from CASCADE to CREATION
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CREATION
CASCADE
Customer account
Customer account
+100
- 100
Citibank N.Y
DTCC
account
account
Clearstream
Citibank
Banking
New York
International Conference Almaty 06 December, 2002
Transfers from CASCADE into
CREATION (Depository US)
•In relation to transfers from CASCADE into CREATION, following data have to be instructed in
CASCADE:
Credit-advice account:
7911
(DTCC)
End beneficiary account:
908
(Citibank N.A., New York)
Text:
089154/XXXXX
(XXXXX= CREATION account)
•Additionally, instructions in CREATION/ CEDCOM have to be fed as follows:
Instruction Type:
6F
Counterpart Account:
U2000
Trade Date:
DDMMYY
(mandatory field)
Narrative:
XXXX
(XXXX= CASCADE account of deliverer)
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Example 3:
DVP settlement with U.S. counterparty
Rec. Customer
CREATION
Customer account
Customer account
+100
- 100
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U.S.
Custodian
Citibank N.Y.
account
account
Receiving
Clearstream
Customer
Banking
International Conference Almaty 06 December, 2002
Corporate Actions
• Interests and dividends on CSC-holdings in CASCADE will be net-credited on the according
CREATION-account in USD. The posting takes place one day after payment day, value date
payment day. A compensation of yields on open stock exchange transactions and OTCtransactions will not take place.
• At present, tax claim and proxy voting service can not be offered by Clearstream Banking
Frankfurt for CSC-holdings. If these services are needed, holdings have to be transferred timely
before the relevant date to CREATION.
• The procedure for capital-changes related to US-securities held in a CSC status will be
published, case oriented, under the internet-address www.deutsche-boerse.com in rubric XList.
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Current consolidation activities in Europe
• The Exchanges are driving the strategies for consolidation
• Key drivers for Exchanges
– Liquidity
– Product range
– Cost
• Competition benefits all market participants
• Four models demonstrate how Exchange strategies drive
Clearing and Settlement infrastructure
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Virt-x : An “Open” model
Exchange strategy: Single trading platform for pan-European blue-chip equities
Virt-x
Transaction
Engine
SIS
SIS
Crest
Euroclear
Clearing and Settlement Model:
• Independent (I)CSDs co-operating to support an exchange
• Flexible settlement location - offers a degree of user choice
• Virt-x defines which (I)CSDs form part of “virtual” single settlement system
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Euronext: A “Quasi-Vertical” model
Exchange strategy:
Expand trading in European equities by absorbing domestic exchanges
Euronext
Paris
Euroclear
France
+
Euronext
Brussels
+
CIK
Euronext
Amsterdam
Single Trading
Platform
Necigef
Single CSD and
settlement system
(“ultimately”)
Clearing and Settlement Model:
• CSDs from a single business group, supporting a related group of exchanges
• Today, each exchange retains direct link to its ‘home’ CSD
• Ultimate plan - a single settlement system supporting a single trading platform
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LSE Model
Exchange strategy:
To encourage International companies to list and be traded on the Exchange.
LSE
To be implemented
Crest
Euroclear
Clearing and Settlement Model:
• Until recently, a single CSD supporting a trading platform
• Euroclear due to be added to attract more non-UK members to the exchange
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DBAG: The so-called “Vertical” model
Exchange strategy:
Enable trading in International equities on a single platform via Xetra Stars segments
DBAG
Clearstream Banking
Frankfurt
Clearing and Settlement Model:
• A single CSD supporting a trading platform
• Existing infrastructure of an efficient domestic CSD also settles transactions
of European and International markets
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Consolidation activities in Europe
Is the public debate the real issue?
Horizontal consolidation
Vertical integration
brings together institutions, such as
stock exchanges [or clearing and
settlement providers], that provide
the same services.
brings together institutions providing
different but complementary services
- for example, trading, clearing and
settlement along the value chain.
Avoidance of duplicate standards,
procedures, systems and costs
creates economy of scale for
customers.
The attractions are a consistent
‘package’ with an opportunity for
efficiency gains and savings.
(Source: The Banker, January 2002)
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Both directions of consolidation possess
advantages and disadvantages
Horizontal
• lower cross-border costs
• potential cost cuts
• economies of scale
Advantages
Disadvantages
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• can be very costly /
high installation costs
(industry experience)
• Long time spans until
benefits are reaped
• rise of a monopoly
Vertical
• competition to the customer’s benefit
• easy and fast to realise
• low installation costs for customers
• easier straight-through-processing
• reduced interfaces > reduced risk
• increased legal certainty
• increased speed, safety and risk
management
reduced risk and costs
•lower potential for cost cuts
•lower economies of scale
International Conference Almaty 06 December, 2002
Are high cross border costs due to a lack of
horizontal integration?
Costs being influenced by
intermediaries and stock
exchanges


Different market practices
Higher economies of scale
20%
40%
Costs being influenced by the
EU and member states



Different legal and tax systems
Different rules for corporate actions
Different countries
40%
Which are difficult to influence or can only
be influenced in the long term


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Small volumes
Different languages and cultures
Source: The Future of Equity Trading
in Europe - a joint research by
McKinsey and JPMorgan
International Conference Almaty 06 December, 2002
In summary: Continuing towards the goal of
a single European capital market
• Support the elimination of legal/regulatory/tax barriers;
• Competition helps deliver what users want - Monopolies are
not the answer;
• The equity strategies of the major Exchanges are:
– all seeking to eliminate cross-border settlement;
– creating some form of vertical silos.
• The target model must be an open one;
• Not be distracted by ‘popular myths’ of the path to
consolidation;
• With the support of Clearstream Banking Frankfurt (CBF),
DBAG strategy is already delivering real value to the market
and our customers.
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How we see the future
Industry structure
•
Concentration into 2 or 3 ‘hubs’ built around the major exchanges;
•
Strong competition between these few;
•
Open Model enabling global customer access.
Our business
• Contribute actively to the creation of the premier European stock exchange;
• Become a leading player in custody, clearing and settlement through
delivering high quality, low cost products and services;
• Continue to play an active role in the consolidation of the European market;
• Prepare new sources of revenue for the future;
• Develop our people and our corporate culture.
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International Conference Almaty 06 December, 2002
CSC / NCSC
Definitions
• CSC Business:
CSC is described in German Depository Law and determines the right of customer on
deposited securities. It states that the end customer is co-owner of the deposited
securities.
CBF would be liable for any claim that the customer makes.
The current stock exchange rules require securities to have a CSC status to be eligible
for trading. Exception: OTC trades (3rd segment).
• NCSC Business:
NCSC indicates that the customer has a pro-rata claim on the securities. CBF is only
liable for those losses for which CBF itself is at fault.
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CSC / NCSC
Eligibility rules for CSC business
 German securities: Securities obtain the CSC status when held in the CBF’s vaults.
 Foreign securities - two scenarios apply:
 German Depositary Receipts are created based on underlying foreign securities.
Since the German DRs are deposited in CBF's vaults, they have CSC status.
 CBF offers CSC status for the foreign securities held at CSDs with which CBF
maintains a direct link (Article 5.4 of the Law on the Safe Custody and Acquisition
of Securities of 4 February 1937).
Note: The list of eligible securities and the addition of new securities in the link
is subject to bilateral agreement.
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