LuxCSD, the CSD of Luxembourg, has received approval by the European Central Bank (ECB) for its Securities Settlement System (SSS) being eligible for use in Eurosystem credit operations.
The key objective of the assessment is to prevent the central banks from bearing inappropriate risks when conducting monetary policy operations and to ensure the same level of safety for the operations of all central banks settled in different ways throughout the Eurozone. With the approval as SSS for use in Eurosystem credit operations, national and supra-national issuers find now all the prerequisites fulfilled to use Luxembourg as an issuance and distribution hub in Euro central bank money.
LuxCSD, a subsidiary of Clearstream, was created in 2010 to enable Luxembourg financial institutions to participate in T2S on an equal footing. The CSD submitted a filing to the ECB in November 2011 and was last week given general approval by the ECB for the use of its securities in refinancing operations. This is very important for potential investors in LuxCSD issued securities as sufficient quality collateral is vital for financial institutions,” said Patrick Georg, general manager of LuxCSD. “The hub is located in a domestic market even though its use is cross border. In Luxembourg particular attention is paid to securities used cross-border to generate liquidity at the ECB.”
Settlement of securities transactions in EUR central bank money adds an important complementary feature to the Luxembourg financial center and reduces risk for financial market participants.
Pierre Thissen, vice-chairman of the Board of Directors at LuxCSD and head of Market Infrastructure and Payment Systems at Banque centrale du Luxembourg, commented: The ECB approval confirms LuxCSD as a safe infrastructure. This strengthens the Luxembourg financial place in its role as efficient issuance and distribution hub in Euro central bank money.”
Commenting on how the issuance and distribution hub will work in practice, Georg said: LuxCSD is working with banks that passed the certification as LuxCSD Principle Agent (LPA). Banks make a connection between issuers and ourselves and having undergone the certification process the issuer can engage those banks as their issuer agent. Once the decision is taken between the parties, the legal work, the bid prospectus and the terms of the issuance is decided then the syndicate of banks guarantees to the issuer that the full amount will be placed in the market on the day of issuance. The security can be created on our books, delivered against payment to the leader of the banking syndicate and the issuer is paid the agreed amount being borrowed. We process the cash flows on accounts of a Eurozone central bank to ensure zero risk for the counterparties. Previously there was no need for this before but given T2S and the market evolution to use central bank money for securities settlement the need for infrastructure to provide that guaranteed process is important.
(JDC)