How securities systems work

Securities processing 

The securities processing chain comprises three steps:

• trading
• clearing
• settlement and delivery

Once they have been executed on an organised market or over the counter, securities transactions are processed by post-market infrastructures: 

• clearing houses
• securities settlement systems

Clearing is the second stage in the processing of securities transactions, after trading.

Clearing is normally provided by an ad hoc infrastructure, the central counterparty, which intermediates in transactions between market participants: it takes the place of each participant, thus becoming the buyer for all sellers and the seller for all buyers.

In this way, the central counterparty pools the counterparty risk. Market participants no longer have to worry about their counterparties defaulting as all of their transactions are conducted with the central counterparty as soon as it becomes involved in the process.

For the central counterparty to fulfil its role effectively and reduce systemic risk, it must be able to adequately manage the counterparty risk that it incurs from market participants. To do this, it harnesses the resources of its members (margins and contributions to a default fund). 

The settlement function is the final step in securities processing, covering the settlement of reciprocal commitments between buyer and seller, and the recording of entries to ensure delivery of the securities to the buyer against payment of the corresponding funds to the seller.

French securities systems

A single clearing agent: LCH SA

LCH SA is the clearing house for transactions in equities, bonds and derivatives on the Paris, Brussels, Amsterdam and Lisbon Euronext markets as well as on European trading platforms. It belongs to the LCH Group, 82.6% of which is owned by the London Stock Exchange Group (LSEG). LCH Group owns 88.9% of LCH SA. The other shares are held mainly by clearing members and trading platforms.

LCH SA also clears French, Italian and Spanish government debt securities and, since 2017, German and Belgian government debt securities. 

Since 2010, LCH SA has also developed a solution for clearing credit default swaps (CDS). LCH SA acts as central counterparty, becoming the sole counterparty for the seller and the buyer, and guaranteeing the performance of transactions in the event of default by another counterparty. To ensure that its guarantee mechanism operates smoothly, LCH SA has deployed extensive risk control measures.

Because of its pivotal role in financial stability, LCH SA is subject to enhanced oversight and supervision.

In France, LCH SA, which has credit institution status, is supervised jointly by the Banque de France, the Autorité de Contrôle Prudentiel et de Résolution (ACPR – Prudential Supervision and Resolution Authority), and the Autorité des Marchés Financiers (AMF – Financial Markets Authority). The competent national authorities perform their duties subject to the opinion of the EMIR College, which comprises nearly twenty authorities from around ten different jurisdictions (central banks, market authorities).

Moreover, given that LCH SA is part of LCH Group Ltd, the French authorities maintain close relations with the UK authorities supervising the group on all matters of common interest.

Euroclear France (including ESES)

Euroclear France occupies a special position as it is both a central French securities depository and one of the operators of the ESES securities settlement system (alongside Euroclear Belgium and Euroclear Nederland).
The settlement agent for the ESES France securities settlement system is the Banque de France. Settlements in ESES France are therefore made in central bank money, which significantly limits credit and liquidity risks in the system and helps to maintain financial stability.

In 2005, the group was restructured around Euroclear SA/NV, a non-financial corporation subject to Belgian law, which became the group's parent company. The former parent company Euroclear Bank (ICSD or International Central Securities Depository) became one of the group's “operational” subsidiaries, alongside the four central depositories for Belgian securities (Euroclear Belgium), UK securities (EUI), French securities (Euroclear France) and Dutch securities (Euroclear Nederlands). The group also includes the central depositories for Finnish securities (Euroclear Finland) and for Swedish securities (Euroclear Sweden).

Euroclear offers a single settlement platform for the Belgian, French and Dutch markets : ESES.

Euroclear France provides post-trade collateral management functions as part of the €GCPlus product for centralised clearing of repo transactions.

ESES France ensures immediate irrevocability of settlements, thanks to simultaneous gross processing of the transfer of the securities leg of transactions, and settlement of the cash leg in central bank currency. This corresponds to a DvP (Delivery versus Payment) model 1.

Settlement in central bank money requires direct participants in the ESES France system to open accounts with the Banque de France. A permanent link between the ESES France system and the TARGET system allows transfers of central bank money to either of the two systems during the day. In the event that their liquidity needs exceed their assets, these participants can automatically obtain intraday credit from the Banque de France, contingent on the provision of eligible collateral as defined by the Eurosystem.