Interdepository Relations of Clearstream Banking Page 1 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 2 International Conference Almaty 06 December, 2002
Organisation Chart Deutsche Börse AG (DBAG) Frankfurt am Main Clearstream International (CI) Luxembourg Clearstream Banking Luxembourg Lux. Clear 3 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. 4 International Conference Almaty 06 December, 2002
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 5 International Conference Almaty 06 December, 2002
Continuous growth Transactions (millions) Custody volume (in trillions of Euro) 8% at hr t row g +47% 29 199 6 e (96 3 ): + -01 +67% +25% -23 % +71% 92 154 119 4. 1 199 8 +19% 5. 6 199 9 2000 2001 market share in Europe 6 +15% 74 43 199 7 te (9 h ra rowt g 13 % 1): + 6 -0 1996 +18% 6. 6 +8% +6 % 7. 1 7. 5 2000 2001 4. 7 1998 1999 approx. 35% International Conference Almaty 06 December, 2002
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 7 • 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 Off-exchange Repos, Swaps, FI Exchanges (derivatives) Integrated clearinghouse/ central counterparty National CSDs 8 US settler ICSDs Trading Clearing (CCP / netting) Settlement International Conference Almaty 06 December, 2002
World Wide Network of Clearstream International CSC CSD-LINKS: • AEX-NECIGEF • APK • Iberclear • BXS-CIK • DTCC • JSSC • Monte Titoli • OEKB • SIS • Euroclear France 9 NCSC World wide sub-custodian network and ICSD-LINKS to: • Euroclear • CBL International Conference Almaty 06 December, 2002
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, Crest. Co Luxembourg: Bqe. Internationale a Luxembourg, Banque Paribas, Bqe. de Lux. , Chase Manhattan Bank, Kredietbank, Credit Lyonnais 10 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 11 Thailand: Thai Farmers Bank USA: Chase Manhattan, Citibank International Conference Almaty 06 December, 2002
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). 12 International Conference Almaty 06 December, 2002
Types of CSD-links • • 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) • 13 Indirect Link: CBL has an account with a sub-custodian which has an account in its own name with the CSD. Direct Link: CBF / CBL has an account in its own name with a CSD Dv. P or Fo. P International Conference Almaty 06 December, 2002
CBL Current links – Indirect Link Outbound Link Type of securities: 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 CBL CBF Loro A/C CBF A/C CBL Nostro A/C Reconciliation CBL Nostro A/C CBF Clients A/Cs 14 International Conference Almaty 06 December, 2002
CBL Current links – Semi-direct Link Outbound Link Subcustodian A/C Type of securities: CSD Reconciliation • CSD eligible securities • Non-CSD eligible securities CBL Loro A/C Instructions Number of accounts: Confirmations • 1 account at the 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 15 International Conference Almaty 06 December, 2002
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 CBF Clients A/Cs • CSD eligible securities Number of accounts: • 1 account at the CSD 16 International Conference Almaty 06 December, 2002
The CSD Link CBF - 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 17 International Conference Almaty 06 December, 2002
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 18 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 Fo. P from Cascade to Creation. 3. Dv. P settlement can now take place between the customers CREATION account and the receiving counterparty‘s custodian bank. 19 International Conference Almaty 06 December, 2002
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 Confirmation (Schlussnote) XONTRO-Trades Buy Confirmation (Schlussnote) Instruction CASCADE LION-Pending S/E Transactions 20 Instruction Buyer account +100 International Conference Almaty 06 December, 2002
Example 2: Transfer of sec. from CASCADE to CREATION CASCADE Customer account +100 - 100 Citibank N. Y account Clearstream Citibank Banking 21 DTCC 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: 6 F Counterpart Account: U 2000 Trade Date: DDMMYY (mandatory field) Narrative: XXXX (XXXX= CASCADE account of deliverer) 22 International Conference Almaty 06 December, 2002
Example 3: DVP settlement with U. S. counterparty Rec. Customer CREATION Customer account +100 - 100 U. S. Custodian account Receiving Clearstream Customer 23 Citibank N. Y. 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 X-List. 24 International Conference Almaty 06 December, 2002
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 25 International Conference Almaty 06 December, 2002
Virt-x : An “Open” model Exchange strategy: Single trading platform for pan-European blue-chip equities Virt-x Transaction Engine 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 26 International Conference Almaty 06 December, 2002
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 27 International Conference Almaty 06 December, 2002
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 28 International Conference Almaty 06 December, 2002
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 29 International Conference Almaty 06 December, 2002
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) 30 International Conference Almaty 06 December, 2002
Both directions of consolidation possess advantages and disadvantages Horizontal • lower cross-border costs • potential cost cuts • economies of scale Advantages Disadvantages 31 • 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 n n Different market practices Higher economies of scale 20% 40% Which are difficult to influence or can only be influenced in the long term n n 32 Small volumes Different languages and cultures Costs being influenced by the EU and member states n n n Different legal and tax systems Different rules for corporate actions Different countries Source: The Future of Equity Trading in Europe - a joint research by Mc. Kinsey 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. 33 International Conference Almaty 06 December, 2002
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. 34 International Conference Almaty 06 December, 2002
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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 (3 rd 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. 37 International Conference Almaty 06 December, 2002
CSC / NCSC Eligibility rules for CSC business n German securities: Securities obtain the CSC status when held in the CBF’s vaults. n Foreign securities - two scenarios apply: à German Depositary Receipts are created based on underlying foreign securities. Since the German DRs are deposited in CBF's vaults, they have CSC status. à 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. 38 International Conference Almaty 06 December, 2002
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