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Interdepository Relations of Clearstream Banking

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

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Interdepository Relations of Clearstream Banking

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  1. Interdepository Relations of Clearstream Banking International Conference Almaty 06 December, 2002

  2. 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 International Conference Almaty 06 December, 2002

  3. Organisation Chart Deutsche Börse AG (DBAG) Frankfurt am Main Clearstream International (CI) Luxembourg Clearstream Banking Luxembourg Clearstream Banking Frankfurt Clearstream Services Luxembourg Clearstream Properties Luxembourg Clearstream Nominees London Clearstream International London Branch LuxClear CSS London International Conference Almaty 06 December, 2002

  4. 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, collateralmanagement, 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. International Conference Almaty 06 December, 2002

  5. Clearstream International’s global presence London Hong Kong Frankfurt Luxembourg New York Dubai São Paulo • 2,500 customers in 94 countries • 1,700 employees • 42 nationalities • 7 offices world-wide • approx. 200,000 eligible securities International Conference Almaty 06 December, 2002

  6. 7.5 7.1 Continuous growth Transactions (millions) Custody volume (in trillions of Euro) growth rate (96-01): +38% +67% growth rate (96-01): +13 % -23 % +25% +6 % +8% +71% 154 +18% +19% 119 92 +15% +47% 6.6 74 5.6 4.7 43 4.1 29 1996 1997 1998 1999 2000 2001 2001 1996 1997 1998 1999 2000 market share in Europe approx. 35% International Conference Almaty 06 December, 2002

  7. Develop-ment Interdepository Relations:Why are they necessary? • physical delivery of securities via train, ship, plane, etc. • low safety levels • low effectivity • high costs History • setting up of electronical links • immobilisation (jumbo receipts) • dematerialization (no printed securites) Book entry Today International Conference Almaty 06 December, 2002

  8. Exchanges(cash markets) ECNs, crossing-networks Exchanges (deriva-tives) Off-exchangeRepos,Swaps, FI Market participants Integrated clearinghouse/central counterparty US settler ICSDs National CSDs Target structure of the European securities industry Trading Clearing (CCP / netting) Settlement International Conference Almaty 06 December, 2002

  9. World Wide Network of Clearstream International CSC • CSD-LINKS: • AEX-NECIGEF • APK • Iberclear • BXS-CIK • DTCC • JSSC • Monte Titoli • OEKB • SIS • Euroclear France • NCSC • World wide • sub-custodian • network and • ICSD-LINKS to: • Euroclear • CBL International Conference Almaty 06 December, 2002

  10. 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 International Conference Almaty 06 December, 2002

  11. 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 International Conference Almaty 06 December, 2002

  12. 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 itself • or another company (like DTC in the USA). International Conference Almaty 06 December, 2002

  13. 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 International Conference Almaty 06 December, 2002

  14. Type of securities: • CSD eligible securities • Non-CSD eligible securities Number of accounts: 1 account at subcustodian CBL Current links – Indirect Link Outbound Link CSD Subcustodian A/C Instructions Confirmations CSD Nostro A/C Subcustodian CBL Loro A/C Confirmations: File Transfer/S.W.I.F.T. Instructions: File Transfer/S.W.I.F.T. Reconciliation Subcustodian Nostro A/C Subcustodian Nostro A/C CBL CBL CBF Loro A/C CBF A/C Reconciliation CBL Nostro A/C CBL Nostro A/C CBF CBF Clients A/Cs Clients A/Cs International Conference Almaty 06 December, 2002

  15. Type of securities: • CSD eligible securities • Non-CSD eligible securities • Number of accounts: • 1 account at the CSD • 1 technical account at agent bank CBL Current links – Semi-direct Link Outbound Link Subcustodian A/C CSD Reconciliation CBL Loro A/C Instructions Confirmations CSD Nostro Technical A/C Agent Bank (Subcustodian) Confirmations: File Transfer/S.W.I.F.T. CBL Technical A/C Instructions: File Transfer/S.W.I.F.T. Agent Bank Nostro A/C CBL Reconciliation CBF Loro A/C CBL Nostro A/C CBF Clients A/Cs International Conference Almaty 06 December, 2002

  16. Type of securities: • CSD eligible securities • Number of accounts: • 1 account at the CSD CBF Current links –Direct Link Outbound Link CSD CBF Loro A/C Reconciliation • Countries where • link exists: • Belgium • Finland • France • Italy • Netherlands • Spain • Switzerland • USA Confirmations: File Transfer/ S.W.I.F.T./ Proprietary Instructions: File Transfer/ S.W.I.F.T./ Proprietary CSD Nostro A/C CBF Clients A/Cs International Conference Almaty 06 December, 2002

  17. The CSD Link CBF - DTCC • 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. • 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 International Conference Almaty 06 December, 2002

  18. USA GERMANY Credit of securities Delivery of securities The Link Structure Depository Trust Clearstream Banking and Clearing Frankfurt Corporation CBF DTCC Delivering 2000 CBF 7911 DTCC Receiving account account account account Filetransfer International Conference Almaty 06 December, 2002

  19. 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. International Conference Almaty 06 December, 2002

  20. Buy Order Sell Order Sell Confirmation Buy Confirmation (Schlussnote) (Schlussnote) XONTRO- Trades Instruction Instruction Buyer account +100 CASCADE LION- Pending S/E Transactions Example 1:Settlement of a trade executed in Berlin • 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. EXCHANGE Seller Buyer XONTRO-Orders Broker International Conference Almaty 06 December, 2002

  21. CREATION CASCADE Customer account +100 Customer account - 100 DTCC Citibank N.Y account Clearstream Banking account Citibank New York Example 2:Transfer of sec. from CASCADE to CREATION International Conference Almaty 06 December, 2002

  22. 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) International Conference Almaty 06 December, 2002

  23. U.S. Custodian Citibank N.Y. account Clearstream Banking Example 3:DVP settlement with U.S. counterparty CREATION Rec. Customer Customer account - 100 Customer account +100 account Receiving Customer International Conference Almaty 06 December, 2002

  24. 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. International Conference Almaty 06 December, 2002

  25. 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 International Conference Almaty 06 December, 2002

  26. Virt-x : An “Open” model Exchange strategy: Single trading platform for pan-European blue-chip equities Virt-x TransactionEngine SIS SIS Crest Euroclear • 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 International Conference Almaty 06 December, 2002

  27. Euronext: A “Quasi-Vertical” model Exchange strategy: Expand trading in European equities by absorbing domestic exchanges EuronextAmsterdam EuronextBrussels EuronextParis + + Single TradingPlatform Euroclear France CIK Necigef Single CSD and settlement system (“ultimately”) • Clearing and Settlement Model: • 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 International Conference Almaty 06 December, 2002

  28. LSE Model Exchange strategy: To encourage International companies to list and be traded on the Exchange. LSE To be implemented Crest Euroclear • Clearing and Settlement Model: • Until recently, a single CSD supporting a trading platform • Euroclear due to be added to attract more non-UK members to the exchange International Conference Almaty 06 December, 2002

  29. DBAG: The so-called “Vertical” model Exchange strategy: Enable trading in International equities on a single platform via Xetra Stars segments • Clearing and Settlement 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 International Conference Almaty 06 December, 2002

  30. 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. Consolidation activities in Europe Is the public debate the real issue? (Source: The Banker, January 2002) International Conference Almaty 06 December, 2002

  31. Both directions of consolidation possess advantages and disadvantages Vertical Horizontal • lower cross-border costs • potential cost cuts • economies of scale Advantages • 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 • lower potential for cost cuts • lower economies of scale Disadvantages • can be very costly / • high installation costs • (industry experience) • Long time spans until • benefits are reaped • rise of a monopoly International Conference Almaty 06 December, 2002

  32. Are high cross border costs due to a lack of horizontal integration? 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 20% 40% 40% 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 International Conference Almaty 06 December, 2002

  33. 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. International Conference Almaty 06 December, 2002

  34. 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. International Conference Almaty 06 December, 2002

  35. Thank you and Goodbye International Conference Almaty 06 December, 2002

  36. Back-up International Conference Almaty 06 December, 2002

  37. 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. International Conference Almaty 06 December, 2002

  38. 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. International Conference Almaty 06 December, 2002

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