The simmering feud between Clearstream and Euroclear over the asymmetrical treatment of deliveries of securities from Germany has spilled into the public domain. Clearstream has complained privately for months that its German repo clients are penalised unfairly by Euroclear if they fail to deliver securities to be exchanged for cash with counter-parties with settlement accounts at Euroclear in time for the overnight processing cycle. But the news late last year that Dresdner had moved its Bund business to Euroclear has brought the issue to a head.
Naturally, German cash-takers are heavy borrowers of Bunds from institutional investors in Germany, and they often fail to deliver the securities in time to for the trades to be processed overnight between Clearstream and Euroclear. This means they incur fines for late delivery from the London Clearing House (LCH), which acts as central counter-party and netting agent to cross-border trades of this kind (and which uses Euroclear as settlement agent). It also means they do not collect the cash from the counter-party, even when the securities become available the following morning, despite the fact they have paid their counter-party for the securities back in Germany. This is because, although the late-arriving securities could in theory be delivered in the daylight cycle, the Euroclear counter-party invariably rejects them. This is not only because he gets to keep and re-invest the cash, but because he has had to pay a fee to borrow the securities automatically from Euroclear because the Euroclear securities lending system does not permit participants to use daylight deliveries to close loans opened in the overnight cycle.
In this sense, the decision by Dresdner to move its business to Euroclear was qualitatively different from the apparently similar announcements by JP Morgan Chase and UBS: it was purely an economic one. Unsurprisingly, the German banks have begun to protest in public forums. The issue was raised repeatedly at meetings of the European Repo Council (ERC), where members are now pushing Euroclear alter its service to allow daylight deliveries to be used to settle overnight loans. The European Central Bank was informed by both the German banks and the ERC, and is believed to be sympathetic to the Clearstream complaint. The problem of inefficient linkages between ICSDs and domestic CSDs in general was also alluded to in the Giovannini Report published in November last year.