Table Of Contents
What Is Euroclear?
Euroclear is the Eurozone’s leading settlement system or securities clearinghouse. It facilitates the settling and clearing of domestic and cross-border securities transactions on the European Exchanges. It serves as both national and international Central Securities Depository (CSD) for Euromarket’s financial institutions across 80 countries.
It administers post-trade processing of securities, including bonds, equity, mutual funds, exchange traded funds (ETFs), and derivatives over the European Financial Exchanges. Also, it cross-checks the information submitted by the brokers engaged in an exchange of securities. Moreover, the Euroclear Bank provides other value-added services, such as securities lending and borrowing, collateral management, asset servicing, fund processing, and ancillary banking services.
Table of contents
- Euroclear is a securities settlement and clearing house for domestic and international asset transactions, including equity, bonds, derivatives, ETFs, and mutual funds on European Exchanges.
- It serves as a local and international central securities depository and custodian bank for various financial institutions, brokers, dealers, investment managers, institutional investors, securities issuers, and other clients.
- Beyond settlement and clearing, it offers additional services like securities custody, asset servicing, collateral management, asset borrowing and lending, and ancillary banking facilities.
How Does Euroclear Work?
Euroclear was established in December 1968 by the Brussels office of Morgan Guaranty Trust Company of New York (subsidy of JP Morgan & Co.) as the Brussels-based operator of the Belgian central securities depository. Since its inception, it has become a leading provider of post-trade services worldwide, particularly within Europe.
It serves as a vital intermediary within the European Exchanges, functioning as both a CSD and a clearing house. The system aims to ensure the seamless execution of securities transactions in Euromarkets. Thus, it provides a centralized platform for settling trades, custody services, and clearance facilities for a wide range of securities, including equities, bonds, and derivatives. Moreover, it provides other services such as corporate action processing, income collection, and tax reclamation to ensure investors receive the benefits of holding securities.
When investors buy and sell securities through brokers or dealers in the financial markets, the transaction details are matched between the buyer and the seller. Also, the system confirms the same with the relevant custodians and counterparties. Following this, the trade settlement is facilitated by transferring ownership of securities to the buyers and cash to the respective sellers.
Examples
These examples will help us understand how the system works:
Example #1
Suppose B is a buyer and S is a seller of a particular Eurobond. They enter a deal where Seller S agrees to sell 1000 units of Eurobond to Buyer B for $257 per unit. The total realizable amount by S is $257,000 ($257 x 1000). Now, Euroclear Bank will act as an intermediary in this bond transaction, ensuring that S transfers 1000 units of Eurobond to B, and B transfers the full payment of $257,000 to S’s bank account.
Example #2
The system operates through various CSDs globally to facilitate diverse securities transaction solutions for clients. It includes:
1. Euroclear UK & International: It manages the Euroclear CREST settlement system across the UK, Jersey, Guernsey, and the Isle of Man.
2. Euroclear Settlement of Euronext-zone Securities (ESES): It follows harmonized rules and practices and a single settlement platform.
3. Euroclear Finland and Euroclear Sweden: It deals in all the domestic shares and debt securities in the Finnish and Swedish capital markets.
Euroclear vs Clearstream vs CREST
These are financial market systems that provide securities settlement, custody, and clearing services to market participants or clients. However, the preference of the clearing and settlement system depends on the location, exchange, type of securities, and specific needs of the participants in the financial markets.
Let us now discuss the broad distinctions between the three securities settlement systems:
| Basis | Euroclear | Clearstream | CREST |
|---|---|---|---|
| Overview | It is a clearing and settlement house for local and cross-border securities trading in the European financial markets. | Clearstream is an international securities custodian and settlement system. It is incorporated through the merger of Deutsche Borse Clearing and Cedel International. | Crest is a UK-based securities settlement system that serves the London Stock Exchange. The Euroclear group acquired it in 2002. |
| Origin | Europe and headquartered in Brussels, Belgium | Europe and headquartered in Luxembourg | United Kingdom |
| Founder | J.P. Morgan & Co’s Morgan Guaranty Trust Company of New York | Merger of Deutsche Borse Clearing and Cedel International | CrestCo |
| Type of organization | It is a user-owned cooperative. | It is a subsidiary of Deutsche Börse Group, a publicly traded company. | Operated by Euroclear U.K. & Ireland Limited (EUI) |
| Established in | December 1968 | January 2000 | 1993 |
| Acts as | Central Securities Depositories and custodian bank | Domestic and International Securities Depository | Software package or DVP Model 1 settlement system |
| Model used | Central Securities Depositories (CSD) | Global Securities Financing Model | Delivery Versus Payment (DVP) Model |
| Securities | Eurobonds, equity, derivatives, mutual funds, ETFs | Eurobonds, stocks, and other securities | Irish equities, gilts, corporate debt, money market instruments, warrants, and English Law depository receipt |
| Services | Primary services include securities settlement, custody, and collateral management; other services include securities lending and borrowing, fund processing, and ancillary banking services. | Post-trading services and post-issuance services such as securities settlement and custody, global issuance services | Facilitates safe and secure exchange of securities in the financial markets, complete fund solutions, asset servicing, securities optimization |
| Clients | Central banks, commercial banks, investment banks, brokers, dealers, supranational organizations, investment managers and retail investors | Trading venues and financial institutions such as central banks, commercial banks, and investment banks | Capital market participants, including banks, custodians, investment houses, local and international brokers, retail investors and individual traders |
| Spread across | More than 80 countries worldwide | 58 financial markets worldwide | UK and Irish markets |
Frequently Asked Questions (FAQs)
Euroclear Investments SA is the parent organization of the Euroclear National and International Central Securities Depositories (CSD).
The system provides securities transaction settlement and clearance solutions with other value-added services to a wide range of Euromarket participants, including those listed on the Euroclear participant list.
The former is a prominent Euromarket clearing and settlement system for local and international securities transactions. On the contrary, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a widely utilized messaging network that aids financial institutions in transferring funds, securities, and information rapidly and safely.
Retail investors typically do not have direct access to these services. They deal with this system through their brokers or financial institutions.
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