Interdepository Relations of Clearstream Banking

International Conference Almaty 06 December, 2002

Interdepository Relations of Clearstream Banking


Agenda

• Brief overview of Clearstream and its core activities

• Why become interdepository relations more and more important?

• Overview of Clearstream’s CSD-links worldwide

• Legal pre-conditions

• Types of CSD-links

• Types of exchanged data

• Example: Interdepository relation between Clearstream and DTCC

• Current consolidation activities in Europe and models for the future


Clearstream International

London Branch

Clearstream Nominees

London

ClearstreamBanking

Luxembourg

Clearstream BankingFrankfurt

Clearstream Services

Luxembourg

Clearstream Properties

Luxembourg

Clearstream Internationa

l(CI)

Luxembourg

Deutsche Börse AG(DBAG)

Frankfurt am Main

LuxClearCSS

London

Organisation Chart


Clearstream’s core activities

• Clearing and Settlement• An intermediary role to ensure that transactions between financial institutions for bonds and equities are completed efficiently and successfully;

• Custody• Safe custody and management of customer securities held on deposit;

• Banking Services• Provision of additional value added services to customers, for example, securities lending and borrowing, collateral management, etc.

• Additional Services• Operating Luxclear, the Central Securities Depository (CSD) for the Grand Duchy of Luxembourg;

• Vestima, our innovative STP solution for Investment and fund processing.


Clearstream International’s global presence

London

New York

Frankfurt

Luxembourg

Hong Kong

São Paulo

Dubai

• 2,500 customers in 94 countries• 1,700 employees • 42 nationalities• 7 offices world-wide • approx. 200,000 eligible securities


Continuous growth

Transactions(millions)

Custody volume (in trillions of Euro)

growth rate (9

6-01): +38%

199819971996 1999

+47%

+71%

+25%

43

74

92

29

growth rate (96-01): +13 %

2000

+67%

154

market share in Europe approx. 35%

4.1 4.7

5.6 6.6 7.1

1996 1997 1998 1999 2000

+15%+19%

+18% +8%

2001 2001

-23 %

+6 %

119 7.5


Interdepository Relations:Why are they necessary?

physical delivery of securities via train, ship, plane, etc.

• low safety levels

• low effectivity

• high costs

History

Today

Develop-ment

• setting up of electronical links

• immobilisation (jumbo receipts)

• dematerialization (no printed securites)

Book entry


Target structure of the European securities industry

US settler ICSDsNational

CSDs

Market participants

Exchanges(cash markets)

ECNs, crossing-networks

Exchanges (deriva-tives)

Off-exchangeRepos,Swaps, FI

Integrated clearinghouse/

central counterparty

Trading

Clearing

(CCP / netting)

Settlement


World Wide Network of Clearstream International

CSD-LINKS:• AEX-NECIGEF• APK• Iberclear• BXS-CIK• DTCC• JSSC• Monte Titoli• OEKB• SIS• Euroclear France

NCSC

World wide sub-custodian network andICSD-LINKS to:• Euroclear • CBL

CSC


Custodian Links - Europe

Austria: Erste Bank d. oesterr. Spark.

Belgium: Banque Bruxelles Lambert

Czech Republic: Citibank

Denmark: Den Danske Bank

Estonia: Eesti Uhispank

Finland: Merita Bank

France: Banque Paribas

Greece: Citibank

Hungary: Türkiye Is Bankasi

Ireland: Citibank

Italy: Bca. Commerciale, San Paolo

Luxembourg: Bqe. Internationale a Luxembourg, Banque Paribas, Bqe. de Lux., Chase Manhattan Bank, Kredietbank, Credit Lyonnais

Netherlands: KAS-Associatie, Necigef,

Abn Amro

Norway: Den norske Bank

Poland: Citibank

Portugal: Banco Santander de Negocios

Sweden: Skandinaviska Enskilda

Switzerland: UBS

Slovakia: CSOB

Spain: Banco Bilbao Vizcaya Argentaria

Turkey: Türkiye Is Bankasi

United Kingdom: Citibank, CrestCo


Custodian Links - Worldwide

Argentinia: Citibank

Australia: ANZ

Canada: Bank of Nova Scotia

China / Shanghai: HSBC

China / Shenzhen: HSBC

Hongkong: Citibank

Indonesia: Citibank

Japan: Bank of Tokyo-Mitsubishi, Industrial Bank of Japan, Sumitamo Bank

Malaysia: OCBC

Mexico: Citibank

New Zealand: Reserve Bank of New Zealand

Singapore: OCBC

South Korea: HSBC

South Afrika: Standard Corporate and Merchant Bank

Thailand: Thai Farmers Bank

USA: Chase Manhattan, Citibank


Pre-Conditions for the establishment of interdepository relations between Clearstream and a foreign custodian

Three Point Declaration

To be signed by the foreign custodian:

• Securities in securities-safekeeping account no. … belong the customers of Clearstream

• Assertion of any securities lien, right of retention or any similar rights only for such claims as may arise from the purchase, administration and safe custody of these securities, immediate information of Clearstream in case of any third party intervention

• Securities are kept in safe custody at a place within the frontiers of the “ABC-Bank”, no entrustment of a third party with the effective safe custody of such securities or transfer to another country without Clearstream’s consent

In case of registered shares: Registration of a nominee (instead of the beneficial owner). According to the legal situation in the respective country this can be Clearstream by itselfor another company (like DTC in the USA).


Types of CSD-links

• Indirect Link:CBL has an account with a sub-custodian which has an account in its own name with the CSD.

• Semi-direct Link:CBL has an account with a CSD in its own name, operated through a technical account with an agent bank (sub-custodian)

• Direct Link:CBF / CBL has an account in its own name with a CSD DvP or FoP


CBL Current links – Indirect Link

SubcustodianCBL Loro A/C

CSD Nostro A/C

CSDSubcustodian A/C

Instructions:File Transfer/S.W.I.F.T.

Confirmations:File Transfer/S.W.I.F.T.

Instructions

Reconciliation

Reconciliation

CBL

CBF

CBL Nostro A/C

CBF A/C

Subcustodian Nostro A/C

Clients A/Cs

Confirmations

CBL

CBFCBL Nostro A/C

CBF Loro A/C

Subcustodian Nostro A/C

Clients A/Cs

OutboundLink

Type of securities:

• CSD eligible securities

• Non-CSD eligible securities

Number of accounts:

1 account at subcustodian


CBL Current links – Semi-direct Link

Agent Bank(Subcustodian)

CBL Technical A/C

CSD Nostro Technical A/C

CSDCBL Loro A/C

Instructions:File Transfer/S.W.I.F.T.

Confirmations:File Transfer/S.W.I.F.T.

Instructions

Confirmations

Reconciliation

Reconciliation

CBL

CBFCBL Nostro A/C

CBF Loro A/C

Agent Bank Nostro A/C

Clients A/Cs

Subcustodian A/COutboundLink

Type of securities:


• Non-CSD eligible securities

Number of accounts:

• 1 account at the CSD

• 1 technical account at agent bank


CBF Current links –Direct Link

Reconciliation

OutboundLinkCSD

CBF

CSD Nostro A/C

CBF Loro A/C

Instructions:File Transfer/ S.W.I.F.T./

Proprietary

Confirmations:File Transfer/ S.W.I.F.T./

Proprietary

Countries where

link exists:

• Belgium

• Finland

• France

• Italy

• Netherlands

• Spain

• Switzerland

• USA

Type of securities:


Number of accounts:

• 1 account at the CSD

Clients A/Cs


The CSD Link CBF - DTCC

• CSD link between CBF and DTCC, was established in 1992

• Bilateral link

• Free of payment

• About 250 securities are held within the link, in a Collective Safe Custody status

• Settlement of trades in these securities is processed through CASCADE system

DTCC

The Depository Trust & Clearing Corporation (DTCC), is a holding company that oversees two principal subsidiaries - The Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC) -. These two firms provide the primary infrastructure for the clearance, settlement and custody of the vast majority of equity, corporate debt and municipal bond transactions in the U.S.


The Link Structure

GERMANYUSA

Clearstream BankingFrankfurt

CBF

7911 DTCC Receiving

Filetransfer

and Clearing Corporation

DTCC

Deliveringaccount

2000 CBFaccount

Depository Trust

Delivery of securities

account account

Credit of securities


Examples

1. Customer A buys 100 Microsoft shares in Berlin; the counterparty is a CBF member. Clearing and settlement takes place in CBF/CASCADE system.

2. Customer A sells 100 Microsoft shares in Nasdaq Europe; the counterparty has no clearing and settlement arrangement with CBF. Clearing and settlement takes place between Creation, Citibank N.Y. and the receiving counterparty‘ s U.S. custodian. Customer A must deliver 100 Microsoft shares FoP from Cascade to Creation.

3. DvP settlement can now take place between the customers CREATION account and the receiving counterparty‘s custodian bank.


Example 1:Settlement of a trade executed in Berlin

Seller Buyer

Sell Confirmation (Schlussnote)

Buy Confirmation(Schlussnote)

XONTRO-Trades

Sell Order Buy Order

CASCADELION-Pending S/E

Transactions

Instruction

EXCHANGEXONTRO-Orders

Broker

• After end of trading, matched instructions are sent to XONTRO-trades.

• Instructions are processed.

• Contract notes (Schlussnoten) are sent to the counterparties; discrepancies have to be notified in T+1, before beginning of trading.

• After trade enrichment contract notes (Schlussnoten) are sent to CASCADE/LION where instructions are generated.

Buyer account

+100

Instruction


Example 2:Transfer of sec. from CASCADE to CREATION

CREATION

Customer account

+100

CASCADE

Customer account

- 100

DTCC

account

Citibank

New York

Citibank N.Y

account

Clearstream

Banking


Transfers from CASCADE into CREATION (Depository US)

•In relation to transfers from CASCADE into CREATION, following data have to be instructed in CASCADE:

Credit-advice account: 7911 (DTCC)

End beneficiary account: 908 (Citibank N.A., New York)

Text: 089154/XXXXX (XXXXX= CREATION account)

•Additionally, instructions in CREATION/ CEDCOM have to be fed as follows:

Instruction Type: 6F

Counterpart Account: U2000

Trade Date: DDMMYY (mandatory field)

Narrative: XXXX (XXXX= CASCADE account of deliverer)


Example 3:DVP settlement with U.S. counterparty

Rec. Customer

Customer account

+100

Citibank N.Y.

account

Clearstream

Banking

CREATION

Customer account

- 100

U.S. Custodian

account

Receiving

Customer


Corporate Actions

• Interests and dividends on CSC-holdings in CASCADE will be net-credited on the according CREATION-account in USD. The posting takes place one day after payment day, value date payment day. A compensation of yields on open stock exchange transactions and OTC-transactions will not take place.

• At present, tax claim and proxy voting service can not be offered by Clearstream Banking Frankfurt for CSC-holdings. If these services are needed, holdings have to be transferred timely before the relevant date to CREATION.

• The procedure for capital-changes related to US-securities held in a CSC status will be published, case oriented, under the internet-address www.deutsche-boerse.com in rubric X-List.


Current consolidation activities in Europe

• The Exchanges are driving the strategies for consolidation

• Key drivers for Exchanges– Liquidity– Product range– Cost

• Competition benefits all market participants

• Four models demonstrate how Exchange strategies drive Clearing and Settlement infrastructure


Virt-x : An “Open” model

Exchange strategy: Single trading platform for pan-European blue-chip equities

Clearing and Settlement Model:

• Independent (I)CSDs co-operating to support an exchange

• Flexible settlement location - offers a degree of user choice

• Virt-x defines which (I)CSDs form part of “virtual” single settlement system

Virt-x

TransactionEngine

SIS Crest EuroclearSIS


Euronext: A “Quasi-Vertical” model

+ +EuronextParis

EuronextBrussels

EuronextAmsterdam

Exchange strategy:

Expand trading in European equities by absorbing domestic exchanges


• CSDs from a single business group, supporting a related group of exchanges

• Today, each exchange retains direct link to its ‘home’ CSD

• Ultimate plan - a single settlement system supporting a single trading platform

Necigef CIK Euroclear France

Single TradingPlatform

Single CSD and settlement system (“ultimately”)


LSE Model

Exchange strategy:

To encourage International companies to list and be traded on the Exchange.


• Until recently, a single CSD supporting a trading platform

• Euroclear due to be added to attract more non-UK members to the exchange

LSE

Crest Euroclear

To be implemented


DBAG: The so-called “Vertical” model


• A single CSD supporting a trading platform

• Existing infrastructure of an efficient domestic CSD also settles transactions of European and International markets

DBAG

Clearstream Banking Frankfurt

Exchange strategy:

Enable trading in International equities on a single platform via Xetra Stars segments


Consolidation activities in Europe Is the public debate the real issue?

Horizontal consolidation

brings together institutions, such as stock exchanges [or clearing and settlement providers], that provide the same services.

Avoidance of duplicate standards, procedures, systems and costs creates economy of scale for customers.

Vertical integration

brings together institutions providing different but complementary services - for example, trading, clearing and settlement along the value chain.

The attractions are a consistent ‘package’ with an opportunity for efficiency gains and savings.

(Source: The Banker, January 2002)


Both directions of consolidation possess advantages and disadvantages

• lower cross-border costs• potential cost cuts• economies of scale

VerticalHorizontal

Disadvantages

Advantages

•lower potential for cost cuts•lower economies of scale

• can be very costly / high installation costs (industry experience)• Long time spans until benefits are reaped• rise of a monopoly

• competition to the customer’s benefit • easy and fast to realise• low installation costs for customers• easier straight-through-processing• reduced interfaces > reduced risk • increased legal certainty• increased speed, safety and risk management reduced risk and costs


Are high cross border costs due to a lack of horizontal integration?

40%

40%

20%

Costs being influenced byintermediaries and stock exchanges

Different market practices Higher economies of scale Costs being influenced by the

EU and member states

Different legal and tax systems Different rules for corporate actions Different countries

Which are difficult to influence or can only be influenced in the long term

Small volumes Different languages and cultures

Source: The Future of Equity Trading in Europe - a joint research by McKinsey and JPMorgan


In summary: Continuing towards the goal of a single European capital market• Support the elimination of legal/regulatory/tax barriers;

• Competition helps deliver what users want - Monopolies are not the answer;

• The equity strategies of the major Exchanges are:

– all seeking to eliminate cross-border settlement; – creating some form of vertical silos.

• The target model must be an open one;

• Not be distracted by ‘popular myths’ of the path to consolidation;

• With the support of Clearstream Banking Frankfurt (CBF), DBAG strategy is already delivering real value to the market and our customers.


How we see the future

Industry structure• Concentration into 2 or 3 ‘hubs’ built around the major exchanges;

• Strong competition between these few; • Open Model enabling global customer access.

Our business • Contribute actively to the creation of the premier European stock exchange;

• Become a leading player in custody, clearing and settlement through delivering high quality, low cost products and services;

• Continue to play an active role in the consolidation of the European market;

• Prepare new sources of revenue for the future;

• Develop our people and our corporate culture.


Back-

up


CSC / NCSC Definitions

• CSC Business:

CSC is described in German Depository Law and determines the right of customer on deposited securities. It states that the end customer is co-owner of the deposited securities.

CBF would be liable for any claim that the customer makes.

The current stock exchange rules require securities to have a CSC status to be eligible for trading. Exception: OTC trades (3rd segment).

• NCSC Business:

NCSC indicates that the customer has a pro-rata claim on the securities. CBF is only liable for those losses for which CBF itself is at fault.


CSC / NCSCEligibility rules for CSC business

German securities: Securities obtain the CSC status when held in the CBF’s vaults.

Foreign securities - two scenarios apply: German Depositary Receipts are created based on underlying foreign securities. Since the German DRs are deposited in CBF's vaults, they have CSC status. CBF offers CSC status for the foreign securities held at CSDs with which CBF maintains a direct link (Article 5.4 of the Law on the Safe Custody and Acquisition of Securities of 4 February 1937).

Note: The list of eligible securities and the addition of new securities in the link is subject to bilateral agreement.

Interdepository Relations of Clearstream Banking

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