Clearstream, the international central securities depository (ICSD) within Deutsche Brse Group, is to launch a central securities depository (CSD) in Luxembourg in early 2011 called LuxCSD. The project has been in construction since early 2009, and will be jointly founded with the Central Bank of Luxembourg.
The move comes as the TARGET2-Securities (T2S) initiative to create a single securities settlement system for the Eurozone gathers pace. However, as the Central Bank Luxembourg has no link to a CSD, it is unable to settle in central bank money, and with the advent of T2S, scheduled to be introduced after 2013, the Luxembourg fund industry runs the risk of being excluded from cross-border settlement of fund transactions in central bank money. LuxCSD aims to offer an alternative solution.
Until now, as an international and cross-border securities processing location, Luxembourg has been best served by the ICSD, said Mark Gem, head of business management and a member of Clearstream’s executive board. Potentially that may change with T2S. What LuxCSD will bring is a central bank money settlement facility to Luxembourg, which thanks to Target 2 means that participants will be able to settle LuxCSD transactions at any Euro-area national central bank, not just the Central Bank of Luxembourg.
“What Lux CSD will do is act as a primary place of deposit for the issuance of securities, notably funds, and potentially debt instruments if the market finds that useful. We do not plan to decommission existing market structures, nor do we plan to impose the use of the CSD on any particular market process. A way of illustrating that is with the investment funds, the CSD will become the legal owner of the positions in the register when those units are issued through the CSD, but it will not take over the function of the register, that will remain with the transfer agent.
Clearstream sees the major users of LuxCSD being investment funds, securities professionals or counterparties who have a strong orientation to the Euro.
In a world of fragmented settlement liquidity, Luxembourg with its ICSD was a natural location for the distribution and settlement of international and cross-border flows, continued Gem. But as the infrastructural elements of a true European internal market fall into place, then clearly we had to recognise that there will be in the future ways of reaching European counterparties cross-border, which will be as efficient as the current international model. Therefore we saw that there is a need for the international market to equip itself with additional tools, whether it is the Euro market on the one hand or the international funds community on the other.
Clearstream has also become the first ICSD to open a full Delivery Versus Payment link to Iceland, easing investor access to equities and bonds listed on the Icelandic Securities Depository.
LuxCSD will not be the first CSD in Luxembourg. VP LUX, a fully-owned subsidiary of the Danish VP Securities, began operations in December 2008, with the aim of making it less costly for Danish banks and mortgage banks to finance operations in the Euro-zone.