Following trading on a regulated or OTC market, the securities involved in the transaction are processed by post-market facilities, which are responsible for payment and the transfer of ownership. The securities processing chain has three stages: trading, clearing and delivery-versus-payment (DVP). The clearing house calculates a net position for each operator and acts as sole central counterparty for both buyer and seller. The DVP system then enables the effective transfer of securities against payment.
Clearing for financial instruments
Clearing comes after trading and is the second stage in the securities processing chain. It usually includes reception and recording of individual transactions coming out of the trading system, calculation of clearing house members' net positions, operation of risk management systems, substitution of the buyer and the seller by a central counterparty (novation) to guarantee the proper completion of transactions, and transfer of net orders to the DVP systems.
A single clearing house: LCH.Clearnet SA
LCH.Clearnet SA's central counterparty functions
LCH.Clearnet SA acts as central counterparty for designated financial instruments, which include equities listed on Euronext markets, derivatives and options, as well as French and German government bonds traded over the counter by certain brokers. Once the trade is recorded by the clearing house, LCH.Clearnet SA becomes the sole counterparty for the buyer and the seller. LCH.Clearnet SA's guarantee extends not only to payment, but also to delivery of securities in the event that the seller fails. As central counterparty, LCH.Clearnet SA helps to reduce the credit and liquidity risks linked to the trading and delivery of the instruments that it accepts. To ensure that its guarantee mechanism operates robustly, LCH.Clearnet SA has rolled out stringent risk-control measures, including rigorous access criteria, daily calculation of member positions, margin calls and a clearing fund.
Recent developments at LCH.Clearnet SA
The LCH.Clearnet Group Limited was created by the January 2004 merger of London Clearing House and Clearnet. At that time, the French clearing house, Clearnet, became LCH.Clearnet SA, 100% owned by LCH.Clearnet Group Limited, just like its UK counterpart, LCH.Clearnet Limited.
The extension of the LCH.Clearnet SA's activities to Belgian, Dutch and French markets has allowed an harmonisation of practices and a rationalisation of facilities performing the clearing for trades conducted on Euronext markets, which use a single clearing platform, Clearing 21, operated by LCH.Clearnet SA.
In 2007, LCH.Clearnet group's ownership structure has been significantly modified by Euronext group's decision to reduce its share in capital of the group. Since then, the users have the majority holding of the group (73.30%) while the first individual shareholder is Euroclear (15.8%).
Evolution of share ownership structure of LCH.Clearnet Group Limited
LCH.Clearnet SA's business activities
Since February 2001, LCH.Clearnet SA is the clearing house and sole central counterparty for Euronext markets in Paris, Brussels, Amsterdam and since 2003 in Lisbon.
LCH.Clearnet SA also acts as clearing house and central counterparty for OTC trades. Notably, as part of a cooperation agreement with Italian central counterparty Cassa di Compensazione e Garanzia and the MTS trading platform, LCH.Clearnet SA provides central counterparty services for trading in Italian government bonds on MTS Italy, EuroMTS and Brokertec.
Securities DVP
How a DVP system operates
The DVP function is the last stage in the securities processing chain. It consists in settling the buyer's and seller's reciprocal commitments and making the book entries that render the transactions final, i.e. delivery of the securities to the buyer and payment of the corresponding funds to the seller.
Euroclear France provides this DVP function in France. A non-financial corporation established under French law, Euroclear France is the French central securities depository (CSD) and operates the RGV2 DVP system. Euroclear France is a subsidiary of Euroclear Group which was created in January 2001 by the merger of Sicovam SA (a company that was set up in 1949 and that changed its name to Euroclear France), Euroclear Netherlands (the Dutch CSD) and Euroclear Bank, a Belgian credit institution and an international CSD. As of September 2002, the UK CSD, CrestCo has joined the group.
After the group restructuring in 2005, Euroclear SA/NV, a non-financial company established under Belgian law, has become the mother company replacing Euroclear bank which became then one of the group subsidiaries with Euroclear Belgium, Crest co (become Euroclear UK and Ireland or EUI in 2007), Euroclear France and Euroclear Netherlands
Ownership structure in 2006
The objective of Euroclear Group formation is to build a single settlement platform available for all the CSDs which are part of the group.
The first step of this integration consisted in building a Single Settlement Engine (SSE) for all group entities. This consolidation of settlement technical infrastructures has been achieved in 2006 and 2007 for French and British markets, as well as Euroclear Bank. SSE's launch Euroclear Netherlands and Euroclear Belgium is scheduled in 2008.
The second step is being achieved in 2007-2008 with the launch of ESES (Euroclear settlement of Euronext-zone securities) which should lead to the creation of a single platform allowing for multi-central bank settlement in real time of securities traded via Euroclear Belgium, Euroclear France and Euroclear Netherlands. This platform will be launched in 3 phases:
stream 1 on 26 November 2007 : launch of ESES platform for the French markets;
stream 2 on 18 February 2008 : connexion of ESSE platform to TARGET 2;
stream 3, fourth quarter 2008 : extension of ESES platform to Belgian and Dutch markets.
Alongside the achievement of stream 3, a Common communication interface (CCI) between Euroclear Group systems and its members' back-offices systems, compliant with the international communication standards, will be put in place.
The operational integration of the group should be completed in 2009-2010 with the launch of Single Platform (SP). At this final stage, a the platform which will already provide real time settlement for French, Belgian and Dutch securities should be extended to the settlement of trades on British and Irish securities.
ESES France, France's DVP system
Since 26 November 2007, ESES France has replaced Euroclear France securities settlement system, RGV2, which was launched on the 12 June 2001 and was composed of one revocable channel (formerly called "Relit+") and one irrevocable channel (formerly called "RGV").
ESES France's implementation has entailed the phasing-out of RGV2 revocable channel. This channel operated the trades negotiated on Euronext Paris on the basis of deferred irrevocability until settlement of the cash balances in TBF. It was also used for transactions operated "over the counter" that were also eligible for RGV but do not require immediate irrevocability. Relit+ follows the principle of deferred irrevocability, with cash settlement occurring on a net basis, which reduces liquidity requirements for system participants. Operating on the basis of a DVP model 2 (within the meaning of 1992 BIS Report "Delivery versus payment in securities settlement systems"), this channel provided final settlement of trades three times a day when the cash leg was settled on the books of Banque de France.
With ESES-France, the principles on which RGV2 irrevocable channel was build, are extended to all trades operated in Euroclear France. The whole settlement of transactions traded on Euronext Paris or "over the counter", and credit operations with the Banque de France as well, are carried out in ESES-France.
ESES France delivers prompt irrevocable settlement via gross and simultaneous settlement of securities and fund transfers, in central bank money. This channel corresponds to a model 1 DVP system within the meaning of 1992 BIS report previously quoted..
Where appropriate, automated intraday repos are set up between the Banque de France and participants to enable transactions to be settled. A permanent link has been established between ESES France and TBF (and TARGET 2 as of 18 February 2008) to enable central bank money to be transferred between the two systems throughout the day. These mechanisms keep the number of trades unsettled at the end of the day at a low level, below 0.40% of funds (average rate between January and December 2007).
