A new central securities depository (CSD) is to be opened by the London Stock Exchange (LSE) Group next year in Luxembourg to provide a full range of custody and settlement services for the eurozone. The rival to Euroclear and Clearstream will be based on the existing infrastructure of the LSE's Italian CSD, Monte Titoli, and follows a trend to set up CSDs in response to the chaning regulatory environment.
JP Morgan will be the main launch customer with the LSE providing settlement, custody and asset servicing services for its international collateral management business on the continent. The incoming European Market Infrastructure Regulation (EMIR) makes this necessary as central counterparties (CCPs) have to hold collateral assets in future, making CSDs more important than ever as a mechanism in the new post-crash banking environment.
EMIR dictates that the majority of over-the-counter (OTC) derivatives trades be cleared through a CCP, which is then required to hold collateral assets as an insurance policy against any defaults at a securities settlement system, such as a CSD, causing the proflieration of such establishments now being seen in the marketplace.
Luxembourg has no doubt been chosen as the venue for the LSE’s new CSD, which is slated to open in Q1 2014, due to its high concentration of private and investment banking business.
Commenting on the announcement, Raffaele Jerusalmi, chief executive of the LSE’s Borsa Italiana marketplace, and director of capital markets at the LSE, said: "The Group is well placed to provide a full range of post trade services to meet the evolving needs of our customers arising from on-going financial regulatory change and the continued focus on operational efficiency."
News Analysis: ECJ Ruling on CCPs
The primary business and regulatory rationale behind the LSE’s announcement of new eurozone CSD is obvious with EMIR imminent, but the move could also be seen as a response to the increasing isolation of the UK in the European Union (EU) as the eurozone increasingly dictates policy. This issue was debated rigorously last Friday by Michel Barnier, the EU Commissioner responsible for internal markets and services including financial services (FS), when he spoke about the divergence between the UK and EU in London. You can see the bobsguide conference report here including the comments of Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), alongside his views about the related topic of the pending European Court of Justice (ECJ) ruling about whether the European Central Bank (ECB) is justified in maintaining that CCPs will in future have to be located within the eurozone if they want to clear euro funds.
Maijoor warned the audience to “be careful” about any such ECJ ruling as it “would make the single market more difficult”. Indeed, if the ECJ backs the ECB’s position then it can be argued it is in contravention of the single market rules which should protect allow the UK to compete for clearing business on a fair and level playing field with other members of the EU. This potentially divisive issue has the potential to run and run.