Clearstream

What Is Clearstream?

Clearstream is a leading provider of post-trade services for the financial markets, operating as a key piece of global financial market infrastructure. Its core business revolves around the settlement and custody of securities, ensuring the smooth and secure transfer of ownership and safekeeping of financial assets after a trade has been executed. Clearstream acts as an International Central Securities Depository (ICSD) for international securities, particularly Eurobonds, and also functions as the central securities depository for domestic German and Luxembourg securities.

History and Origin

Clearstream was formed in January 2000 through the merger of Cedel International and Deutsche Börse Clearing AG, bringing together significant players in both international and domestic securities services. Cedel, initially established in Luxembourg in 1970 by a consortium of financial institutions, focused on facilitating the issuance and distribution of the burgeoning Eurobond market. Deutsche Börse Clearing AG, on the other hand, had roots tracing back to the Frankfurt securities depository founded in 1949, and later encompassed the merged German central securities depositories. ¹⁴This strategic merger created Clearstream as a unified provider of settlement and custody services for both national and international securities transactions, becoming a wholly-owned subsidiary of Deutsche Börse Group in 2002.

¹³## Key Takeaways

Clearstream is a major provider of post-trade services, focusing on the settlement and custody of securities.
It operates as both an International Central Securities Depository (ICSD) and a national central securities depository (CSD).
Clearstream offers a broad range of services including collateral management, securities lending, and investment fund services.
Its role is crucial in facilitating cross-border transactions and maintaining the integrity of global financial markets.

Formula and Calculation

Clearstream's operations do not involve a direct financial formula or calculation in the traditional sense, as its primary function is infrastructure-based rather than focused on valuing assets or derivatives. Instead, its "calculations" relate to processing volumes, asset values under custody, and operational metrics. For example, key operational metrics might include:

Assets Under Custody (AUC): The total value of securities that Clearstream holds on behalf of its clients. This is a measure of the scale of its safekeeping activities.
Transaction Volume: The number of securities transactions Clearstream settles daily or annually, reflecting its role in market liquidity and efficiency.

These are aggregate figures reflecting the total sum of the nominal or market value of underlying assets entrusted to its care or the count of transactions processed.

Interpreting Clearstream

Clearstream's significance is interpreted through its pivotal role in the global financial ecosystem. As an ICSD, Clearstream enables efficient cross-border transactions, reducing operational complexities and risks associated with international securities trading. Its large assets under custody and high transaction volumes indicate its critical function in maintaining market stability and providing a secure environment for the transfer and safekeeping of securities. The presence of a robust entity like Clearstream allows market participants to trade across different jurisdictions with confidence, knowing that their trades will settle efficiently and their assets will be securely held.

Hypothetical Example

Consider an investment manager in New York who wants to purchase Eurobonds issued by a company in Germany. Without a post-trade service provider like Clearstream, this transaction would involve complex, potentially risky, and time-consuming steps, including coordinating physical delivery or direct book-entry transfers between disparate national systems and managing foreign exchange for payment.

With Clearstream, the process is streamlined. The investment manager places an order, and once the trade is agreed upon, Clearstream facilitates the simultaneous exchange of cash and securities—a process known as Delivery Versus Payment (DVP). The Eurobonds, already held in safekeeping within Clearstream's system, are transferred from the seller's account to the buyer's account at Clearstream. The cash payment is likewise settled through Clearstream's integrated cash accounts. This means the manager doesn't need to physically move bonds or directly interact with the German national system, significantly reducing the settlement time and associated risk management complexities.

Practical Applications

Clearstream's services are fundamental across various aspects of the financial industry:

Securities Trading and Settlement: Clearstream facilitates the rapid and secure settlement of trades, which is essential for liquid and efficient markets. This includes processing new issues and managing income and redemption payments.
¹² Custody and Asset Servicing: It provides comprehensive custody services, encompassing the safekeeping of securities and the handling of corporate actions like dividends and mergers.
Collateral Management and Securities Financing: Through its Global Liquidity Hub, Clearstream offers services such as collateral management and securities lending, which are vital for liquidity and risk mitigation in financial markets.
¹¹ Investment Fund Services: Clearstream operates Vestima, a platform that supports the cross-border distribution and processing of various fund types, from mutual funds to exchange-traded funds (ETFs).
¹⁰ Regulatory Compliance: As a regulated entity, Clearstream plays a key role in helping issuers and market participants meet their regulatory obligations, especially under frameworks like the Central Securities Depository Regulation (CSDR) in the EU, which aims to increase the safety and efficiency of securities settlement. Cle⁹arstream is critical infrastructure for enabling market participants to adhere to strict European regulatory standards on settlement, helping foster greater financial stability under the oversight of bodies like the European Securities and Markets Authority (ESMA). The⁸ sheer scale of Clearstream's operations, with custodial assets totaling approximately 16 trillion euros in 2021, underscores its importance to the global financial system. Thi⁷s scale is further highlighted by its strategic acquisitions, such as the full acquisition of Clearstream Fund Centre by Deutsche Börse, aiming to grow its fund distribution platform.

⁶Limitations and Criticisms

Despite its crucial role, Clearstream, like any major intermediary in the financial system, has faced scrutiny and criticism. One notable area of concern has been its alleged involvement in controversial tax evasion schemes, specifically the "Cum-Ex" scandal in Germany. Investigations have probed Clearstream's role, with allegations that staff were more involved in the scheme than previously known, potentially misleading authorities. The ⁵Cum-Ex deals reportedly allowed multiple parties to claim refunds on a tax that was only paid once, costing European countries billions of euros. Clea⁴rstream has stated its cooperation with the investigating authorities in these matters.

His³torically, Clearstream has also faced legal challenges related to sanctions violations. For instance, Clearstream Banking S.A. agreed to a significant settlement with the U.S. Treasury for apparent violations of Iranian sanctions, which involved maintaining accounts through which Iran's central bank held beneficial ownership interests in securities. Thes²e instances highlight the inherent complexities and risk management challenges for large post-trade service providers operating across numerous jurisdictions and dealing with diverse client bases.

Clearstream vs. Euroclear

Clearstream and Euroclear are often discussed together as they are the two dominant International Central Securities Depositories (ICSDs) globally. Both provide essential post-trade services, including settlement, custody, and collateral management, serving as crucial infrastructure for cross-border securities transactions. While their core functions are similar, their historical origins and market focus have created distinct characteristics. Clearstream was formed from a merger that combined a strong international focus (Cedel) with a key German domestic CSD (Deutsche Börse Clearing AG), giving it a significant footprint in the Eurobond market as well as the German and Luxembourg domestic markets. Euroclear, on the other hand, originated from a system established by Morgan Guaranty Trust Company of New York in Brussels in 1968, and has grown to be a major player with a strong presence in various European national markets and a broad range of asset classes. The key difference lies more in their historical development and specific market niches they historically dominated, rather than a fundamental difference in the types of services offered as ICSDs.

FAQs

Q: Is Clearstream a bank?
A: While Clearstream provides some banking-type ancillary services and is supervised by financial regulators, its core function is as a post-trade service provider and a central securities depository, rather than a traditional commercial bank that takes deposits and issues loans to the general public.

Q: What is the primary role of Clearstream?
A: Clearstream's primary role is to provide essential post-trade services to the financial industry, particularly the secure and efficient settlement and custody of securities. This involves ensuring that when a trade occurs, the ownership of securities is transferred correctly and safely, and the assets are held in a secure environment.

Q: How does Clearstream make money?
A: Clearstream generates revenue through fees for its various services, including settlement, custody, asset servicing (like handling dividends and corporate actions), global securities financing (e.g., securities lending), and investment fund services.

Q: Who owns Clearstream?
A: Clearstream is a wholly-owned subsidiary of Deutsche Börse AG, the German stock exchange operator.

Q: Does Clearstream handle physical securities?
A: While Clearstream historically dealt with physical securities, the vast majority of securities it handles today are "immobilized" or "dematerialized," meaning they are represented by electronic book entries rather than physical certificates. Clearstream's systems record and transfer ownership electronically, enhancing efficiency and reducing risks.¹