The seemingly interminable saga of the electronic bridge between Clearstream and Euroclear took another twist yesterday with the news that Clearstream will no longer charge customers for intra-day securities borrowing. The move is a direct response to concern that it will lose its core tri-party securities financing customers in Germany, which it believes are at present being penalized unfairly by the operation of the bridge.
Anybody who has not followed the story of the bridge closely in the last six months will be surprised to learn that it is still a matter of contention. The problem appeared to be solved in November 2003, when the introduction of same-day settlement over the Bridge solved the difficulty created by the 2001 decision by Clearstream to make same-day settlement mandatory.
But German participants in the European repo market delivering Bunds to counterparties with accounts at Euroclear have still found themselves incurring automatic securities borrowing charges when they fail to deliver securities on time. And some Euroclear counterparts had started to make clear they would prefer not to deal with Clearstream counterparts, forcing them to shift their business to the Brussels-based ICSD
Initially, the European Repo Council (ERC), the representative body of the European repo industry, urged its members to boycott the automated securities lending and borrowing facilities at both ICSDs – on grounds it was unfair for them to incur costs occasioned by mandatory settlement deadlines they did not choose and could not alter. The ICSDs countered that the result of a boycott would simply be a further deterioration in settlement efficiency.
To resolve the issue, ERC and ICSD representatives meet in Frankfurt on 7 July, under the auspices of the European Central Bank (ECB). At the meeting, it was agreed that LCH.Clearnet, as the leading CCP in the repo market, would work with Euroclear and Clearstream to find a solution through the netting process. Euroclear also agreed to urge its members to submit settlement instructions earlier, whether or not trades were netted via the CCP, to create more time for trades to settle within the tighter timetable.
It was also proposed at the July meeting that Euroclear open a sub-account at Clearstream Banking Frankfurt, so netting could take place within the books of the German CSD, but this idea was rejected. Most importantly, the ERC representatives agreed to continue to support automated securities lending, but urged the ICSDs to make intra-day borrowing free of charge.
It was this last suggestion to which Clearstream responded positively at an ERC meeting held in Luxembourg on Tuesday. The Luxembourg-based ICSD will now charge now fees for intra-day lending up to 1.00 pm each day, compensating lenders from its own resources in order to do so. Clearstream say that, depending on the ability of its technical staff to deliver the technology, free-of-charge intra-day borrowing will start by the end of this year or early next year.
Euroclear has yet to make a similar offer. Eduard Cia, the head of the short term interest rate desk at HVB in Munich, described the Clearstream announcement yesterday as “very good news for us all.” He added that “hopefully Euroclear will do it the same way and we do not need to discuss any more the settlement problems of German securities.”