This means of providing cross-border liquidity is currently unique in Europe and is regarded by market participants as a pioneering step towards the creation of a smoothly functioning European settlement market. The Deutsche Bundesbank initially implemented this guarantee concept together with two other central banks. The intention is for further central banks to become involved as partners with the Bundesbank, should this reflect a need on the part of foreign commercial banks.
Under the guarantee concept, participants make liquidity available for the German market by means of deposits in cash or securities at their national central bank, which submits a cross-border guarantee to the Bundesbank. The liquidity is thus available in Germany within the framework of the usual Clearstream process with the Bundesbank.
The central banks are thus meeting their legal obligation to enhance the efficiency of payment transfers. It is in the interest of both central banks and commercial banks to ensure that cross-border securities settlement takes place in central bank money which is free of credit and liquidity risks. Commercial banks with Europe-wide operations can optimise their liquidity management by concentrating their liquidity (cash and collateral) at the central bank in their home country.
"The guarantee concept contributes to a level playing field by making the same access to central bank money available to domestic and foreign participants in cross-border transactions," said Matthias Ganz, CEO of Clearstream Banking Frankfurt. "The central banks, in cooperation with Clearstream, have found a solution that increases the efficiency of cross-border transactions and substantially reduces the costs for customers."
Background
Securities and cash aspects of the settlement process
In securities settlement, a distinction is made between securities settlement via the central securities depositories (CSDs) and cash settlement via the national central banks. In the New German Settlement Model introduced on 14 November, both aspects take place simultaneously. This eliminates possible unwinding risks resulting from default by a counterparty. The bulk of securities transactions are settled overnight - which is why the new settlement model leads to far lower market risks.
For legal reasons, however, foreign banks are only granted the credit needed for securities settlement from their national central banks and up to now have made use of what are referred to as "agent banks" for cash settlement in Germany. The guarantee concept of the Deutsche Bundesbank and Clearstream gives participants a connection to the Bundesbank through their national central bank and thus direct access to the cash aspect of the settlement process in the German market. This means that final cash settlement in central bank money is possible even if TARGET, the European large-value payments system, is closed. The process promotes the use of central bank money for cross-border securities transactions, eliminating credit and liquidity risks .
