LuxCSD, a 50/50 joint venture between Clearstream and the Banque Centrale du Luxembourg (BCL), is set to go live in the coming months. The CSD, designed to facilitate the access for Luxembourg to T2S when it arrives in Europe in 2014, has outsourced its operations to its parent Clearstream, the international central securities depository. Clearstreams Patrick Georg, the first executive to be announced publicly and revealed here for the first time, will serve as the general manager of the organization. Why does Luxembourg even need its own CSD, since Clearstream Luxembourg already offers a capable service there? Georg responds, adding that LuxCSD hopes to follow its parent beyond the borders of Luxembourg and across Europe
Can you outline the services that will be provided by LuxCSD?
LuxCSD is to provide safe custody and settlement of securities which are principally denominated in euros. The background of the company is that it is a joint venture between the Luxembourg Central Bank and Clearstream International, and it really is to provide central bank money settlement in Luxembourg and across the Eurozone. Being based in Luxembourg, you would think it is a bit of a domestic setup typically as most CSDs are domestic oriented. However, you need to realize Luxembourg as a financial center in the industry is living from cross-border flows. We have the largest cross-border execution of investment funds located in Luxembourg with over 2 trillion in assets, and also the securities and bond issuance side is really cross-border. The trigger for LuxCSD is domestic, but its orientation is the Eurozone.
As a 50/50 joint venture between Clearstream and BCL, what are the respective roles of the two organizations?
LuxCSD has been created to represent Luxembourg in the European Central Bank project TARGET2-Securities. The two shareholders demonstrate the two aspects of the company. Obviously the company, the for-profit side is represented by Clearstream, but the company is also answering a public need so to speak, which is that Luxembourg has been represented in the European-wide project. So the central bank role as a shareholder is to ensure the public interest is brought in the right balance with the commercial interest of Clearstream. The situation that the company or entity is created in Luxembourg to participate in a European initiative is not a first. The Luxembourg Central Bank was only created in 1998 in order for Luxembourg to participate in the euro. That demonstrated the cross-border nature of the business, because there was no need previously for the domestic business to have such an entity, which really is a structural change on a European level.
Why does Luxembourg need its own CSD given the existing strength of Clearstream in the country?
So far obviously Luxembourg is very well served by Clearstream in Luxembourg as an ICSD given the nature of the cross-border business. The reason why Luxembourg is not in a position to enter into the T2S project in the same level other country CSDs are doing is that the eligibility criteria as part of T2S is to perform settlement in central bank moneycash at the central bank. Clearstream Luxembourg uses a cash account at Clearstream. It is a structural difference, hence the need for Luxembourg to set up such an entity. Clearstream was and is servicing Luxembourg very well in terms of securities processing. It was obvious to the local players, to the central bank, to approach Clearstream to set up an entity to represent Luxembourg with the ECB.
So LuxCSD will exist side-by-side with Clearstream Luxembourg in the future?
Yes, that will be the case. There is room on a long-term basis for both service offerings, depending on the nature of the financial institutions active in the securities industry. The central bank money offering or the commercial bank money offering might be preferable. To put it in an extreme way, I would say that cash depositors at the universal bank in the Eurozone would favor the central bank money service [offered by LuxCSD]. A New York-based broker dealer, for instance, has no possibility to have a cash account at the Eurozone central bank, and might prefer the commercial bank money offering [offered by Clearstream Luxembourg]. It is about structural access and the capabilities of the financial institution.
How does the service offering of LuxCSD differ from that of Clearstream Luxembourg
LuxCSD is completely building on the service capability of the ICSD. So you can say we service quite the same services except for banking services. LuxCSD is not a bank. You cannot expect a credit line from LuxCSD. You should not expect securities lending at this stage. However, what is very important in terms of asset servicing, we will be capable from the start of servicing any security serviced by Clearstream Banking Luxembourg.
LuxCSD was created in response to TARGET2-Securities. In what way will the CSD facilitate T2S?
There are two aspects to this. On one side, the investment fund side, the issuance of securities needs to take place to ensure the investment funds issued in Luxembourg can be distributed to investors who would expect to receive such fund shares in an account within T2S. On the other side, combined with the investment funds business are large custodian banks in Luxembourg. They need to ensure themselves and their customers retain the best possible access to European securities, which in the future will be processed through T2S. So both the investor and the issuer side need to be facilitated, and LuxCSD will facilitate them.
What is the timeframe for LuxCSD being launched?
There are different phases. We have outsourced to Clearstream the technical platform. The major implementation will be in the middle of September, to enable LuxCSD and to create specific processes such as the central bank money settlement. A number of more legal and regulatory steps need to be taken and will most likely be completed a few weeks later. We cannot know the precise date at this time, but it looks like an October time frame.
Certain licenses are needed. We received one already, the Professionnel du Secteur Financier (PSF) [issued by the Commission de Surveillance du Secteur Financier, the Luxembourg regulator], but another needs to be granted [Securities Settlement System status, designated by the Banque Centrale du Luxembourg and notified to the European Commission]. In Luxembourg the regulators have been very supportive, but it just takes a little time.
For more, see LuxCSD – Why Luxembourg, the incentive behind the initiative, Global Custodian, Fall 2010. Visit the LuxCSD Web site here.
Christopher Gohlke