War strains Luxembourg's investment-flows powerhouse
(This story was corrected to show that Clearstream Banking CEO Philippe Seyll misspoke when describing the company's credit rating. Bond rating agencies give Clearstream at double-A rating.)
Russia’s war against neighbouring Ukraine has meant longer hours, added pressure and intense scrutiny for Luxembourg-based Clearstream, one of the world’s essential securities-trading middlemen.
The EU, the US, Japan and others have unleashed round after round of sanctions to weaken Russia’s financial system after the start of the war, leaving Clearstream to find a balance in applying restrictions on the €13 trillion that will flow through its computer systems this year.
The company is one of the world’s primary firms ensuring custody and payments for security trades, and it needs to show that its interpretation of sanctions is both accurate and fair, Clearstream Banking CEO Philippe Seyll told the Luxembourg Times. That could include having to go to court.
“It's quite stressful for us and the staff,” Seyll said. To cope with the pressure, “we have increased the staffing in those areas that have to deal with the sanctions. It is not neutral on the organisation."
Just last year, the insolvency administrator of Air Berlin sued Clearstream years after the airline went bankrupt, seeking to recover €500 million under the theory that Clearstream was registered as a shareholder on behalf of investors.
A dedicated team at Clearstream is monitoring the sanctions as the company clears and settles securities transactions, holds securities in custody on behalf of clients - a business known as depositary banking - and offers fund distribution services, Clearstream said in its annual report.
“Of course, we are in touch with pan-European regulators, we are in touch with the European Central Bank (and) all their peers in the market,” Seyll said.
Clearstream Banking - which reported flat profits of €237 million last year -- started backing out of Russian clients seven years ago, Seyll said, shortly after Moscow invaded eastern Ukraine and annexed the Crimean peninsula.
"The banking business is about mastering your risk,” he said. “We believe that in the case of Russia, the risk/return was not in our favour. Consequently, we decided to reduce that risk.”
While Clearstream’s revenue from Russia and interest income from rubles is set to fall this year due to the sanctions, the company does not consider any impact to be material, it said last month. The company said days after the invasion that it would no longer handle trades of securities denominated in rubles.
On the other hand, Clearstream and Ukraine’s national bank three years ago reached an agreement that made it easier for Kiev to attract financing from emerging-markets investors worldwide. The relationship allowed settlement of government bonds denominated in Ukrainian hryvnia, boosting the liquidity of the country’s sovereign debt in markets, Kiev said at the time.
"The idea there was that we would put Clearstream -- a double-A rated, Luxembourg-based bank -- between the investors and the actual debt,” Seyll said. “We helped investors to invest into the national debt of Ukraine, and we are still doing so.”
Germany's Deutsche Börse Group, which owns Clearstream, in March bought Luxembourg fund data manager Kneip, which handles disclosure of what is inside thousands of investment funds in dozens of countries. The two companies together employ more than 1,100 people in Luxembourg.
The acquisition is part of Deutsche Börse's strategy to draw more revenue from data, said Seyll, who is now the chairman of Kneip.
The firm collects data about funds containing multiple assets, enabling customers to analyse them and make better investment decisions, Kneip Chief Executive Officer Enrique Sacau said during the Luxembourg Times interview.
For example, someone with millions at stake might want to know whether money is moving today from bond funds and into money market funds.
"We have not exploited the opportunity to create actionable insight or real business intelligence on the back of the data we hold," Sacau said. "We know that asset managers are demanding that we do so more and more."
Sacau and Seyll aren't rattled by the forces building inflation that threaten to push the global economy into recession again. Both their firms have business models built around regulations, laws and practices that make world finance safer for investors - and their clients have regulatory requirements to meet no matter what happens in the business cycle, they said.
So the Luxembourg companies are largely insulated from market turmoil pushed by high Russian gas prices or embargoes, food that becomes too expensive for African countries to afford, and Chinese production shutdowns or real estate implosions, Sacau and Seyll said.
More pension funds and insurance companies will invest in hedge funds and other so-called alternative investments, all of which must be traded and tracked, the two men said during the interview.
"If you look at the last 30 years, there is a trend -- a global growth of the middle classes -- which is what's fuelling the growth. So basically you have people in India saving for their retirement. You have people in China saving for their retirement. You have everybody in the West living until they are 85 and therefore needing to save for their retirement," Sacau said. "This trend will not be reversed even if there were to be a recession."