Finance

Euroclear System

Euroclear System

Euroclear System is a clearinghouse that settles and clears securities trades executed on European exchanges. It is one of the two principal securities clearinghouses in the Eurozone. It is a Belgium-based financial service,  specialized in verifying information supplied by brokers in security transactions and the settlement of securities transacted on the European Exchange.

How does it work?

A clearinghouse means a financial institute that acts as an intermediary between the buyers and sellers.  Euroclear was originally subsidized by Morgan guaranty Trust Company of New York, which was a part of J.P. Morgan & Co. and is one of the oldest settlement systems. It was founded in 1968 to settle trades on developing Eurobonds. Euroclear’s computerized settlement and deposit system helped ensure the safe delivery and payments of Eurobonds. Morgan guaranty trust transferred these activities to Euro bank in 2001. It is now publically owned and governed. A clearinghouse is a financial institution that acts as an intermediary between buyers and sellers of financial instruments. They take the opposite position and acts as a counterparty for buyers and sellers in the market. They act as a buyer to the seller and a seller to a buyer. It works smoothly and efficiently. Mostly the client’s Euroclear system consists of banks, brokers, dealers, and other professional institutes.

Euroclear acts as a Central Security Depository (CDS) for its clients, and many of these traders trade on European Exchange. The transactions are irrecoverable once the transactions are settled. The cost and risk between the Euroclear participants are heavily influenced by local market practices. A Euroclear Bank credits securities to participants only if it has received the securities for the account of such participants. All securities accepted by Euroclear are eligible for securities lending and borrowing except those that are limited by liquidity, fiscal, or legal restrictions. If the borrower has insufficient securities in its account to make delivery standard borrowings are allocated. Borrowings are then reimbursed on the first day of the settlement process. Securities are then distributed to the borrowers and loans are allotted among lenders according to the procedures.

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Participants in Euroclear:

Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries. The European system was created in 1968 to hold securities for participants in Euroclear and to effect transactions between Euroclear participants through simultaneous book-entry delivery against payment, thereby eliminating the need for physical; movement of certificates and any risk from lack of simultaneous transfer of securities and cash. Distributions concerning interests in securities held through Euroclear will be credited to the Euroclear cash accounts of Euroclear participants to the extent received by the euro clear depositary by the Euroclear terms and conditions. There are several divisions of Euroclear such as Belgium, Finland, France, Nederland, Sweden, UK & Ireland.

Importance of Euroclear system:

  • Euroclear is a major clearinghouse that settles and clears securities trades executed on European exchanges.
  • In addition to stock trades, Euroclear also handles orders in fixed income and derivatives.
  • Euroclear also functions as a central security depository, where it is the custodian for major financial institutions involved in European markets.
  • Euroclear System has two sides cash side and security side. The security side concerns with the transfer of securities and traditional activity of the clearance system and the cash side represent a transfer of funds. It eliminates counterparty risk.

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Bottom line:

Euroclear system is a Belgium-based financial company that specializes in the settlement of securities transactions as well as the safekeeping and asset servicing of these securities. It was founded in 1968 as part of J.P Morgan & co. to settle trades on the then developing Eurobond market.

 

Author – Hariharan Krishnan and Isha Patel

About the Author – Hariharan Krishnan is currently in second year BAF and is also doing FRM part 1. He is passionate about financial markets and loves to play chess and outdoor games.

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