Finance, Technology and Macroeconomics

Euroclear System and Clearstream Banking

Clearstream Banking S.A. (CB) is the clearing division of Deutsche Börse, based in Luxembourg. It was created in January 2000 through the merger of Cedel International and Deutsche Börse Clearing, part of the Deutsche Börse Group, which owns the Frankfurt Stock Exchange. Cedel, established in 1971, specialized in clearing and settlement. In 1996 it obtained a bank licence.

In July 2002 Deutsche Börse purchased the remaining 50% of Clearstream International for €1.6 billion. Deutsche Börse's strategy is to be a vertical securities silo, providing facilities for the front and back ends of securities trading. By 2004 Clearstream contributed €114 million to Deutsche Börse's total Earnings Before Interest and Taxes (EBIT) of €452.6 million. It handled 50.0 million transactions and was custodian of securities worth € 7,593 trillion.

Following the publication of Révélation$ (2001) by investigative reporter Denis Robert and Ernest Backes, Clearstream was accused of being an international platform for money laundering and tax evasion via an illegal system of secret accounts. This became known as the "Clearstream Affair". However, in Spring 2004, a "Second Clearstream Affair" began, which exploded in 2006. This Second Affair, peripheral to the primary Clearstream Affair, accused several French political figures, industrial leaders and members of the secret services of maintaining secret accounts at Clearstream, which allegedly were used to transfer the kickbacks in the French-Taiwan frigates scandal.

Clearing

Clearstream often has been described as a bank for banks, as it practices what is called financial clearing. Basically, its duty is to record each transaction between the accounts of different banks, and using that data to calculate the relative financial positions of banks with regard to each other.

So a bank can just order a transaction between its own account and the other bank's account, in lieu of less secure methods such as carrying a case full of currency or securities around on the street; the bank merely transmits an order to Clearstream to credit/debit one of its own accounts and the other bank's account(s). This general system is in use between regular companies, and governments, and banks around the world.

The purpose of Clearstream is to facilitate money movements around the world, particularly by handling the resolution of sales of European stocks and bonds, in which market Clearstream was a major player, with an estimated 40% market share until May 2004 - together with its competitor Euroclear, the two firms settle 70% of European transactions [3]. Furthermore, in 2005, Clearstream was the 17th biggest employer in Luxembourg [4].

Clearstream does not hold a monopoly in this market: Euroclear, owned by Euronext, and SWIFT are competitors. However, SWIFT mainly assures routing, while only Euroclear and Clearstream supply cross-borders securities clearing and settlement services; Clearstream's quasi-monopoly is demonstrated by this European Union statement declaring that "Clearstream Banking AG is an unavoidable trader partner" [5].

Euroclear was created by JP Morgan in 1968 in Brussels (Belgium). By the end of 2000, JP Morgan had extricated itself from Euroclear, but JP Morgan still is one of the 120 international banks which own shares in Euroclear. In 2000, Euroclear processed 145 million transactions, dealing with a total of 100,000 billion euros [6].

Eurodollars

Cedel (now Clearstream) and Euroclear were started to manage transfers of "eurodollars", U.S. currency kept in banks outside the United States. By the 1990s, the Federal Reserve estimated that about 2/3 of U.S. currency was held abroad as eurodollars.

Cedel and Euroclear later expanded into handling transfers of stock titles and other financial instruments. In 1975, several big Italian and German banks wanted to centralize their accounting, so other members of Cedel directly sent them transfers to the main branch.

"The Cedel council of administration -- its board of directors -- authorized banks with multiple subsidiaries not to put all their accounts on the published list. Backes and Gérard Soisson, then Cedel's general manager, set up a system of non-published accounts (...) Requests for non-published accounts came from some banks that were not eligible, but Soisson turned them down", writes Komisar [7].

posted by JD @ 3:06 PM