Luxembourg Central Bank Finds 'Material Evidence' At Clearstream

by Ulrika Lomas, Tax-News.com, Brussels

11 June 2001

In a speech on Friday, Luxembourg's Yves Mersch, Governor of the Luxembourg Central Bank, said that the investigation of securities clearing firm Clearstream had found "material evidence which would lead to a fundamental questioning of the settlement system." He said that a final assessment would be made after the results of the judiciary investigation have been made public.

The investigation was launched after two French journalists, one of them a former Cedel employee, published a book earlier this year in which they alleged that the depository allowed clients to open accounts for the purposes of money laundering. Yves Mersch said however that the book's allegations were flimsy, and that it didn't withstand serious reading.

Clearstream has denied the allegations and started legal proceedings against the journalists. On 16 May, the board of directors suspended three senior managers including the firm's high-profile chief executive, Andre Lussi, until the investigation has been completed, a move that is common in such situations.

"I have to say that money laundering as such is not part of our competence as overseer of securities settlement systems," said Mr Mersch, "Our role in this respect is first of all to make sure that Clearstream's securities settlement system functions properly and that it still deserves the confidence of its customers."

The Central Bank of Luxembourg in fact was only created last year as a result of the Treaty of Maastricht, and took over supervision of Clearstream in January this year. Mersch said recently that such a small country as Luxembourg, which has had a currency union with Belgium for the last 20 years, doesn't need a central bank, and indeed it seems somewhat bizarre to bring it into existence just as the euro is being introduced.

Market participants expect that Clearstream, which is owned 50/50 by Deutsche Bourse and Cedel, will be taken over or merged with another company after the investigation. Deutsche Borse wants to buy out Cedel's 50% stake, but a group of Cedel's owners including the large investment banks who supply most of the liquidity to Europe's bourses want to compete in the auction.

"I have noticed that this event (Clearstream) gave a new impetus to speculations concerning the future of the European securities settlement industry," Mersch said. "For some observers, the future of Clearstream itself seems to be rather cloudy, which, concerning a major building block of the Luxembourg finance centre, would be particularly worrying. Together with other Luxembourg authorities, we have to make sure the baby is not thrown out with the bathwater."

"As regards the future of the securities clearing and settlement industry, two different models, supported each by two different banking communities seem to be opposing: the vertical silo against the horizontal model of a merger between the ICSDs," Mersch said. "Whatever the outcome of the battle may be, a lot of issues will have to be tackled first. Any further step in the consolidation process will, for instance, raise the issue of competition and the related choice of the corporate structure of the new entity: profit-making company versus the public utilities."

One of the most pressing needs of the European securities trading industry is the creation of a pan-European clearing, settlement and share registration agency, in order to reduce the exorbitant costs of clearing, which are reckoned to be up to seven times higher than they are in the US.

 

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