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Interdepository Relations of Clearstream Banking. 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 - PowerPoint PPT Presentation
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International Conference Almaty 06 December, 2002Page 1
Interdepository Relations of Clearstream Banking
International Conference Almaty 06 December, 2002Page 2
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
International Conference Almaty 06 December, 2002Page 3
Clearstream International
London Branch
Clearstream Nominees
London
ClearstreamBanking
Luxembourg
Clearstream BankingFrankfurt
Clearstream Services
Luxembourg
Clearstream Properties
Luxembourg
Clearstream Internationa
l(CI)
Luxembourg
Deutsche Börse AG(DBAG)
Frankfurt am Main
LuxClearCSS
London
Organisation Chart
International Conference Almaty 06 December, 2002Page 4
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.
International Conference Almaty 06 December, 2002Page 5
Clearstream International’s global presence
London
New York
Frankfurt
Luxembourg
Hong Kong
São Paulo
Dubai
• 2,500 customers in 94 countries• 1,700 employees • 42 nationalities• 7 offices world-wide • approx. 200,000 eligible securities
International Conference Almaty 06 December, 2002Page 6
Continuous growth
Transactions(millions)
Custody volume (in trillions of Euro)
growth rate (9
6-01): +38%
199819971996 1999
+47%
+71%
+25%
43
74
92
29
growth rate (96-01): +13 %
2000
+67%
154
market share in Europe approx. 35%
4.1 4.7
5.6 6.6 7.1
1996 1997 1998 1999 2000
+15%+19%
+18% +8%
2001 2001
-23 %
+6 %
119 7.5
International Conference Almaty 06 December, 2002Page 7
Interdepository Relations:Why are they necessary?
physical delivery of securities via train, ship, plane, etc.
• low safety levels
• low effectivity
• high costs
History
Today
Develop-ment
• setting up of electronical links
• immobilisation (jumbo receipts)
• dematerialization (no printed securites)
Book entry
International Conference Almaty 06 December, 2002Page 8
Target structure of the European securities industry
US settler ICSDsNational
CSDs
Market participants
Exchanges(cash markets)
ECNs, crossing-networks
Exchanges (deriva-tives)
Off-exchangeRepos,Swaps, FI
Integrated clearinghouse/
central counterparty
Trading
Clearing
(CCP / netting)
Settlement
International Conference Almaty 06 December, 2002Page 9
World Wide Network of Clearstream International
CSD-LINKS:• AEX-NECIGEF• APK• Iberclear• BXS-CIK• DTCC• JSSC• Monte Titoli• OEKB• SIS• Euroclear France
NCSC
World wide sub-custodian network andICSD-LINKS to:• Euroclear • CBL
CSC
International Conference Almaty 06 December, 2002Page 10
Custodian Links - Europe
Austria: Erste Bank d. oesterr. Spark.
Belgium: Banque Bruxelles Lambert
Czech Republic: Citibank
Denmark: Den Danske Bank
Estonia: Eesti Uhispank
Finland: Merita Bank
France: Banque Paribas
Greece: Citibank
Hungary: Türkiye Is Bankasi
Ireland: Citibank
Italy: Bca. Commerciale, San Paolo
Luxembourg: Bqe. Internationale a Luxembourg, Banque Paribas, Bqe. de Lux., Chase Manhattan Bank, Kredietbank, Credit Lyonnais
Netherlands: KAS-Associatie, Necigef,
Abn Amro
Norway: Den norske Bank
Poland: Citibank
Portugal: Banco Santander de Negocios
Sweden: Skandinaviska Enskilda
Switzerland: UBS
Slovakia: CSOB
Spain: Banco Bilbao Vizcaya Argentaria
Turkey: Türkiye Is Bankasi
United Kingdom: Citibank, CrestCo
International Conference Almaty 06 December, 2002Page 11
Custodian Links - Worldwide
Argentinia: Citibank
Australia: ANZ
Canada: Bank of Nova Scotia
China / Shanghai: HSBC
China / Shenzhen: HSBC
Hongkong: Citibank
Indonesia: Citibank
Japan: Bank of Tokyo-Mitsubishi, Industrial Bank of Japan, Sumitamo Bank
Malaysia: OCBC
Mexico: Citibank
New Zealand: Reserve Bank of New Zealand
Singapore: OCBC
South Korea: HSBC
South Afrika: Standard Corporate and Merchant Bank
Thailand: Thai Farmers Bank
USA: Chase Manhattan, Citibank
International Conference Almaty 06 December, 2002Page 12
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 itselfor another company (like DTC in the USA).
International Conference Almaty 06 December, 2002Page 13
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
International Conference Almaty 06 December, 2002Page 14
CBL Current links – Indirect Link
SubcustodianCBL Loro A/C
CSD Nostro A/C
CSDSubcustodian A/C
Instructions:File Transfer/S.W.I.F.T.
Confirmations:File Transfer/S.W.I.F.T.
Instructions
Reconciliation
Reconciliation
CBL
CBF
CBL Nostro A/C
CBF A/C
Subcustodian Nostro A/C
Clients A/Cs
Confirmations
CBL
CBFCBL Nostro A/C
CBF Loro A/C
Subcustodian Nostro A/C
Clients A/Cs
OutboundLink
Type of securities:
• CSD eligible securities
• Non-CSD eligible securities
Number of accounts:
1 account at subcustodian
International Conference Almaty 06 December, 2002Page 15
CBL Current links – Semi-direct Link
Agent Bank(Subcustodian)
CBL Technical A/C
CSD Nostro Technical A/C
CSDCBL Loro A/C
Instructions:File Transfer/S.W.I.F.T.
Confirmations:File Transfer/S.W.I.F.T.
Instructions
Confirmations
Reconciliation
Reconciliation
CBL
CBFCBL Nostro A/C
CBF Loro A/C
Agent Bank Nostro A/C
Clients A/Cs
Subcustodian A/COutboundLink
Type of securities:
• CSD eligible securities
• Non-CSD eligible securities
Number of accounts:
• 1 account at the CSD
• 1 technical account at agent bank
International Conference Almaty 06 December, 2002Page 16
CBF Current links –Direct Link
Reconciliation
OutboundLinkCSD
CBF
CSD Nostro A/C
CBF Loro A/C
Instructions:File Transfer/ S.W.I.F.T./
Proprietary
Confirmations:File Transfer/ S.W.I.F.T./
Proprietary
Countries where
link exists:
• Belgium
• Finland
• France
• Italy
• Netherlands
• Spain
• Switzerland
• USA
Type of securities:
• CSD eligible securities
Number of accounts:
• 1 account at the CSD
Clients A/Cs
International Conference Almaty 06 December, 2002Page 17
The CSD Link CBF - DTCC
• 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
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.
International Conference Almaty 06 December, 2002Page 18
The Link Structure
GERMANYUSA
Clearstream BankingFrankfurt
CBF
7911 DTCC Receiving
Filetransfer
and Clearing Corporation
DTCC
Deliveringaccount
2000 CBFaccount
Depository Trust
Delivery of securities
account account
Credit of securities
International Conference Almaty 06 December, 2002Page 19
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.
International Conference Almaty 06 December, 2002Page 20
Example 1:Settlement of a trade executed in Berlin
Seller Buyer
Sell Confirmation (Schlussnote)
Buy Confirmation(Schlussnote)
XONTRO-Trades
Sell Order Buy Order
CASCADELION-Pending S/E
Transactions
Instruction
EXCHANGEXONTRO-Orders
Broker
• 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.
Buyer account
+100
Instruction
International Conference Almaty 06 December, 2002Page 21
Example 2:Transfer of sec. from CASCADE to CREATION
CREATION
Customer account
+100
CASCADE
Customer account
- 100
DTCC
account
Citibank
New York
Citibank N.Y
account
Clearstream
Banking
International Conference Almaty 06 December, 2002Page 22
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)
International Conference Almaty 06 December, 2002Page 23
Example 3:DVP settlement with U.S. counterparty
Rec. Customer
Customer account
+100
Citibank N.Y.
account
Clearstream
Banking
CREATION
Customer account
- 100
U.S. Custodian
account
Receiving
Customer
International Conference Almaty 06 December, 2002Page 24
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 OTC-transactions 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 X-List.
International Conference Almaty 06 December, 2002Page 25
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
International Conference Almaty 06 December, 2002Page 26
Virt-x : An “Open” model
Exchange strategy: Single trading platform for pan-European blue-chip equities
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
Virt-x
TransactionEngine
SIS Crest EuroclearSIS
International Conference Almaty 06 December, 2002Page 27
Euronext: A “Quasi-Vertical” model
+ +EuronextParis
EuronextBrussels
EuronextAmsterdam
Exchange strategy:
Expand trading in European equities by absorbing domestic exchanges
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
Necigef CIK Euroclear France
Single TradingPlatform
Single CSD and settlement system (“ultimately”)
International Conference Almaty 06 December, 2002Page 28
LSE Model
Exchange strategy:
To encourage International companies to list and be traded on the Exchange.
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
LSE
Crest Euroclear
To be implemented
International Conference Almaty 06 December, 2002Page 29
DBAG: The so-called “Vertical” model
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
DBAG
Clearstream Banking Frankfurt
Exchange strategy:
Enable trading in International equities on a single platform via Xetra Stars segments
International Conference Almaty 06 December, 2002Page 30
Consolidation activities in Europe Is the public debate the real issue?
Horizontal consolidation
brings together institutions, such as stock exchanges [or clearing and settlement providers], that provide the same services.
Avoidance of duplicate standards, procedures, systems and costs creates economy of scale for customers.
Vertical integration
brings together institutions providing different but complementary services - for example, trading, clearing and settlement along the value chain.
The attractions are a consistent ‘package’ with an opportunity for efficiency gains and savings.
(Source: The Banker, January 2002)
International Conference Almaty 06 December, 2002Page 31
Both directions of consolidation possess advantages and disadvantages
• lower cross-border costs• potential cost cuts• economies of scale
VerticalHorizontal
Disadvantages
Advantages
•lower potential for cost cuts•lower economies of scale
• can be very costly / high installation costs (industry experience)• Long time spans until benefits are reaped• rise of a monopoly
• 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
International Conference Almaty 06 December, 2002Page 32
Are high cross border costs due to a lack of horizontal integration?
40%
40%
20%
Costs being influenced byintermediaries and stock exchanges
Different market practices Higher economies of scale Costs being influenced by the
EU and member states
Different legal and tax systems Different rules for corporate actions Different countries
Which are difficult to influence or can only be influenced in the long term
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, 2002Page 33
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.
International Conference Almaty 06 December, 2002Page 34
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.
International Conference Almaty 06 December, 2002Page 35
International Conference Almaty 06 December, 2002Page 36
Back-
up
International Conference Almaty 06 December, 2002Page 37
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.
International Conference Almaty 06 December, 2002Page 38
CSC / NCSCEligibility 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.