Competition Policy Newsletter

The decision: the application of Article 82 to ANTITRUST securities and Eduardo MARTÍNEZ RIVERO and Rosalind BUFTON, Directorate-General Competition, unit D-1

On 2 June 2004 the Commission adopted a deci- CSD is referred to as the ‘issuer CSD’ and is not an sion finding that Clearstream Banking AG and its intermediary. A CSD can also offer processing parent company Clearstream International SA services as an intermediary in cross-border violated Article 82 by refusing to supply certain clearing and settlement, where the primary deposit clearing and settlement services to one of its of securities is in another country. customers ( Bank SA), and by applying discriminatory prices to that same customer. Clearstream Banking AG is Germany's only Wert- papiersammelbank (CSD). 1. Clearing, settlement and custody An ICSD is an organisation whose core business is clearing and settling securities — traditionally Securities clearing and settlement are necessary Eurobonds — in an international (non-domestic) steps for a securities trade to be completed. In the environment. There are at present two ICSDs in decision, clearing is referred to as the process that the EU: Euroclear Bank, based in , and ensures that the buyer and the seller have agreed on Clearstream Banking Luxembourg (CBL), a an identical transaction and that the seller is selling subsidiary of Clearstream International SA and a securities which it is entitled to sell. Settlement is sister company to Clearstream Banking AG. An the transfer of securities from the seller to the ICSD can also provide other services such as buyer and the transfer of funds from the buyer to intermediary services for equities. the seller, as well as the relevant annotations in securities accounts. Intermediaries such as banks may also provide clearing and settlement services to their clients. In addition to the steps necessary to complete a securities transaction, securities also need to be safekept. The terms safekeeping and custody are 3. The relevant market used interchangeably to refer to the actual depos- The relevant market in this case is the provision by iting with the entity that holds a in phys- the issuer CSD (Clearstream Banking AG) to ical or electronic form. This is also referred to as CSDs in other Member States and to ICSDs of the ‘primary deposit’ or ‘final custody’. As ‘primary’ clearing and settlement services for opposed to final custodians, intermediaries securities issued according to German law. perform services in relation to securities but do not hold securities in final custody. While, as explained above, clearing and settlement may generally be carried out by CSDs, ICSDs or 2. Central Securities Depositories, other intermediaries such as banks, only final International Central Securities custodians may perform ‘primary’ clearing and settlement for the securities actually deposited in Depositories and other final custody. In the present case, all securities intermediaries issued under German law and kept in collective safe custody — the only significant form of Providers of clearing and settlement services may custody in Germany today for traded securities — be Central Securities Depositories (CSDs), Inter- are deposited with Clearstream Banking AG, and national Central Securities Depositories (ICSDs) only this company can conduct the primary or other intermediaries such as banks. clearing and settlement related to these securities. Primary clearing and settlement therefore occurs A CSD is an entity which holds and administers when there is a change in the position of a securi- securities and enables securities transactions to be ties account held with the issuer CSD (CBF for processed through book entry. In its home country, securities issued according to German law). it provides processing services for trades of those securities that have been deposited with it (which it In contrast, secondary clearing and settlement is holds in final custody), and in this function the performed downstream by intermediaries in their

Number 2 — Summer 2004 49 Antitrust own books. Secondary clearing and settlement obtain substitutable services either in-house or encompasses both mirror operations through from another intermediary; which intermediaries reflect the result of primary — the issuer CSD is not constrained by the prices clearing and settlement in the accounts of their applied by intermediaries when primary customers and annotations in account following clearing and settlement is needed. During the internalised transactions. Internalisation takes time that Euroclear Bank sought unsuccess- place where the intermediary is able to settle the fully to obtain price reductions for primary transaction in its own books because both the clearing and settlement services directly from buyer and seller happen to hold accounts with that Clearstream Banking AG and cease using a intermediary. local agent as an intermediary, the prices In the present case, it became apparent that the applied by that local agent did not constrain particular services that Clearstream provided to Clearstream in its discussions with Euroclear CSDs and ICSDs cannot be compared to the stan- Bank. dard services provided to what Clearstream called ‘non-CSD customers’ (banks), who are supplied 4. Dominance on the basis of Clearstream Banking AG's General Terms and Conditions. Clearstream Banking AG is dominant in the rele- vant market since it is the only CSD where securi- An issue that the Commission examined in detail is ties issued under German law and kept in collec- whether clearing and settlement by intermediaries tive safe custody are deposited. It is thus the only could be a substitute to the primary clearing and entity able to perform primary clearing and settle- settlement performed by Clearstream Banking ment for these securities. The position of AG. Clearstream Banking AG is not constrained by any actual competition in the market. New entry is It is important to underline that, for market defini- unrealistic in the foreseeable future. tion purposes, the Commission must not examine the needs of the intermediaries' clients, but rather the specific needs of the category of clients who 5. The abuse require the product or service, that is, in the present case, the needs of financial intermediaries like The decision identifies two types of abuse: Euroclear Bank, who desire to provide economi- cally significant, efficient and competitive a) Refusing to supply primary clearing secondary clearing and settlement services to their and settlement services for registered own clients. For this category of customers, the Commission took the view that: shares and discriminating against Euroclear Bank in relation to the — indirect access to the issuer CSD — Clear- stream Banking AG in the present case — provision of those services through an intermediary is not a substitutable The refusal to supply took the form of denying alternative for direct access (given that the use access to CASCADE RS (2). Without this access of an intermediary results in poorer deadlines, Euroclear Bank could not receive the clearing and greater risk and complexity, additional costs settlement services of registered shares on the and potential conflict of interests (1)); CASCADE platform whereas it could continue to — no intermediary is able to internalise all trans- receive this service for other transactions. The actions with all potential counterparties for all qualification of Clearstream's behaviour as refusal securities safekept in the issuer CSD and there- to supply follows from the combination of a fore access to the issuer CSD is a requirement. number of factors: Clearstream Banking AG is an The present case precisely relates to a situation unavoidable trading partner, Euroclear Bank could where an intermediary (Euroclear Bank) not duplicate the services that it was requesting, required primary clearing and settlement and the refusal to supply had the effect of services from the issuer CSD and could not impairing Euroclear Bank's ability to provide a

(1) The use of a local agent bank as an intermediary may create conflicts of interest, as the intermediary may be an actual or potential competitor in the downstream market and is informed of the operations of the customer against which it is competing or might start competing in the downstream market. (2) CBF provides services via an IT platform referred to as CASCADE. CASCADE RS is the CASCADE subsystem that serves the purpose of inputting information in relation to registered shares.

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comprehensive and innovative pan-European objective justification for the difference in prices. ANTITRUST service in the downstream market for cross-border To reach this conclusion, the Commission exam- clearing and settlement of EU securities. In addi- ined in detail the information regarding services tion, one of the effects of the growing importance and costs that Clearstream provided in reply to the of registered shares in Germany (1) was a reduction Commission's requests for information. in the services provided to Euroclear Bank, an existing customer of Clearstream, and Clearstream breached Euroclear Bank's legitimate expectations 6. The need to clarify the legal situation that it would be supplied by Clearstream with and provide guidance, and the non- primary clearing and settlement services within a imposition of fines reasonable time. There is also discrimination because the dilatory The Clearstream decision was adopted when the behaviour vis-à-vis Euroclear Bank contrasts with infringements had already ceased. The Commis- the reasonable delay within which other compa- sion found it necessary to adopt a decision for a rable customers were supplied: Euroclear Bank number of reasons, including the need to clarify asked for access to CASCADE RS on 3 August the legal situation and provide guidance, both to 1999 and only obtained access on 19 November Clearstream and to other undertakings active in 2001, while CSDs that requested access to clearing and settlement, at a moment when the CASCADE RS were granted access either almost industry is consolidating within the EU. immediately or in a maximum of one month, and The Commission however decided not to impose the other ICSD (Clearstream Banking Luxem- fines. Among other factors, the Commission took bourg) received access within four months. The into account that: Commission considered that the infringement ran between 3 December 1999 (2) and 19 November — there is no Community decisional practice or 2001. case law relating to the complex area of clearing and settlement services; the decision b) Applying discriminatory prices for analyses for the first time the clearing and settlement processes in the context of market primary clearing and settlement definition, as well as other sector-specific 3 services ( ) issues such as internalisation, and this analysis has a direct bearing on the legal analysis of the Between 1 January 1997 and 1 January 2002, case; Clearstream charged a higher per transaction price to Euroclear Bank than to CSDs outside Germany. — clearing and settlement services in the EU are In addition, Euroclear Bank, unlike CSDs, also evolving, in particular as regards cross-border paid an annual fee covering partly settlement transactions. Different institutions and fora services. have been for some time discussing issues connected with the functions of the various The decision considers that Clearstream discrimi- actors in the industry. The scope for nated against Euroclear Bank in violation of internalisation, the role of CSDs and ICSDs Article 82 because the content of the primary and their relationship with large custodian clearing and settlement services for cross-border banks are matters being actively debated and transactions provided by Clearstream to CSDs and that are connected to the subject matter of the to ICSDs is equivalent, and because there is no Clearstream decision.

(1) Registered shares are the most widely internationally traded German shares and therefore likely to be included in transactions of an ICSD’s clientele. (2) The initial four-month period between 3 August and 3 December 1999 can be considered as a reasonable period within which Clearstream would not be refusing to supply. To ascertain what a reasonable maximum period for Clearstream Banking AG to provide direct access to CASCADE RS would be, the Commission took into account internal companies’ plans in the present case and comparative data originating from various customers. (3) It should be noted that this concerns the pricing for all transactions processed on CASCADE for Eurocler Bank and is not restricted to registered shares, unlike in the case of the previous abuse.

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