The ECU clearing
 
 

Gilbert Lichter

Secretary General of the ECU Banking Association



The Ecu clearing started operating on lst October 1986. Its history however dates back to 1982, when the Commission of the European Communities suggested to five commercial banks (1) to examine ways and possibilities for setting up a multilateral clearing system for the so called "private" Ecu payments.

The initial group of five banks was eventually enlarged to an ad hoc working group including 18 commercial banks from various EC countries and the European Investment Bank.

Contacts were taken with the Bank for International Settlements (BIS) to discuss a possible role of the BIS as accounting agent and banker to the clearing system.

The design of the Ecu clearing had to take into account three major pre-conditions :

- on the technical side, the clearing had to be based on a Europe wide telecommunication system;
- on the functional side, the clearing had to cope with the absence of a lender of last resort institution;
- on the monetary side, the constitution of a monetary base and the regulation of liquidity had to involve the creation and destruction of Ecus by bundling and unbundling the basket.

Discussions conducted within the working group on the one part, and with the BIS and SWIFT on the other part, came to a first conclusion at the beginning of 1986, with the signing of a clearing agreement between the BIS and the Ecu Banking Association on 21st March 1986 (2) .
 

1 - TECHNICAL DESCRIPTION OF THE ECU CLEARING SYSTEM

The type of clearing system devised for the Ecu in a first instance is a "next-day-value" clearing, meaning that, on a given business day, only payments carrying value next business day are cleared.

The functional structure of the clearing may be split in two consequent stages
 

The netting stage

During the morning of a business day and until a first cut- off time called "preliminary cut-off time", (presently at 13.00 Brussels time), all Ecu payment messages transmitted amongst clearing banks via the SWIFT network are automatically intercepted and copied to a special netting computer operated by SWIFT SERVICE PARTNERS.

Payment messages for value next day sent after preliminary cut-of f time and representing payments by customer or correspondent bank order are automatically value date adjusted to the next value day.

Immediately after preliminary cut-off time, the netting computer establishes for each bank a preliminary netting report including all payments made and received by that clearing bank f or the relevant value day, as well as their balance. This preliminary netting report is communicated to each bank within a span of 7 to 10 minutes after preliminary cut-off time.

Positive preliminary netting balances are considered as intra-clearing assets that may be lent or sold to clearing banks having a negative netting balance.

Accordingly, balance-reducing transactions are undertaken by the clearing banks, either by lending intra-clearing Ecus on a Tom/Next basis, or by selling them against one currency or all the currencies of the basket under value next day.

These transactions give rise to Ecu payments from the lending or selling clearing bank to the borrowing or buying clearing bank, which have to be transmitted through the SWIFT system before final cut-off time (presently at 14.30).

Immediately after final cut-off time, the netting computer establishes the final netting balances of each clearing bank, taking into account the preliminary netting balances and the payment messages resulting from the balance-reducing transactions. Each clearing bank then receives its final netting report, with the BIS receiving report on all final netting balances.

Two observations need to be made with regard to the netting stage :

- The use of the SWIFT transmission network. as technical infrastructure of the Ecu clearing system, with the netting computer. intercepting automatically all Ecu payment messages amongst the clearing banks, enables the banks to adapt to the new system with minimal interface and message handling problems.

The transactions amongst clearing banks between preliminary and final cut-off time aim at reducing the final balances to a rather low level; as such they represent a kind of pre-settlement amongst the clearing banks.
 

The settlement stage

For the purpose of carrying out the settlement operations, two types of accounts have been foreseen for each clearing bank :

- a clearing account held by the BIS acting in its capacity as accounting agent to the clearing. The clearing account of a bank is debited or credited with its final netting balance, thus representing a record of the claims or liabilities of that clearing bank towards all the other clearing banks.

- an Ecu sight account, opened in the books of the BIS, with the purpose to settle each day the balance of the clearing account. This Ecu sight account carries no remuneration and may not be in a debit position.

The system provides two possibilities for supplying the Ecu sight accounts :

- by Ecu transfers from one sight account to another, these transfers being the result of a sale or lending transaction between two clearing banks;

- by transferring all the component currencies of the Ecu to special accounts opened by the BIS in the books of the central banks whose currencies are components of the Ecu.

On the basis of its final netting balance on a given day, and considering the existing funds in its Ecu sight account, each clearing bank has to :

- borrow or buy from another clearing bank Ecus available for value next day in the latter's sight account, or

- transfer to the BIS all the component currencies equivalent to the amount of Ecus required.

Ecu payment orders related to those transactions have to be sent to the BIS before settlement time (which is presently at 15.00).

In view of the funds available in each clearing bank's sight account and after having taken into account the above mentioned payment orders, the BIS checks whether all settlement operations can be done without any sight account getting into a debit position.

If this is the case, the BIS executes the settlement operations :

- by debiting or crediting each banks clearing account with the amount of its final netting balance, and
- by settling the clearing account balance through debiting or crediting the bank's Ecu sight account.

Should however one clearing bank be unable to provide its sight account with sufficient funds to settle its clearing balance, the system foresees the possibility of an "unwind". In that case, the non-performing bank is suspended from the clearing; all the payment orders given and received by the non-performing bank on that day are cancelled, the remaining payments being automatically value-date-adjusted to the next value date.
 

Il - THE USE OF COMPOSENT CURRENCIES AND THE SETTLEMENT RATE FIXING MECHANISM

Although the clearing procedures foresee an exchange of Ecus against the basket of component currencies as a possible transaction for reducing a preliminary netting balance, the recourse to the component currencies during the clearing operations proved to be technically rather inconvenient, as all the currencies of the basket had to be transferred and received under one value date only.

In order to avoid these difficulties, the clearing banks have implemented as of lst October 1987 a component currencies exchange system that is operated outside the clearing and under two value days, coupled with an interest rate fixing mechanism for intra-clearing borrowings. Accordingly, each clearing bank advises the BIS at 4 p.m. on the amount to component currencies it is offering or searching in exchange of Ecus under value two days. This long or short (3) positions in component currencies usually result from exchange transactions (Ecu against component currencies) a clearer undertakes with non-clearers under two value days. After 4 p.m. the BIS established the total net position in component currencies of the system (while clearers with opposite positions enter into exchange transactions).

The day after, at 12 p. m., each clearer communicates to the BIS its EIBOR and EIBID Tom/Next interest rates (4). On the basis of the rates received until 12.30 p.m. and after eliminating the 4 highest and the 4 lowest rates of each type of interest rate, the BIS calculates the average EIBOR and EIBID rates as well as EIMEAN (av. EIBOR + av. EIMEAN divided by 2). The Tom/Next interest rate applicable to all settlement operations on that day is determined according to the following procedure :

- EIBID in the case the total position in component currencies as established the evening before is long
- EIBOR if the position is short and
- EIMEAN if the position is close to zero.

On the basis of this arrangement the clearers agreed to settle their preliminary netting balances by Tom/Next borrowings or lendings in Ecus only.

As such the elimination of basket transactions inside the clearing is a first step in the direction of increasing the autonomy of the Ecu as a currency.
 

Ill - THE PLACE OF THE ECU CLEARING IN THE FINANCIAL WORLD

The Ecu clearing started operating on Ist October 1986 for a six months trial period. Seven banks that previously took part in the MESA clearing system (5) , were mandated by the EBA to run the trial period and test the clearing infrastructure as well as the clearing procedures. Upon assessment of the experience gained, the mechanism of the system proved to be reliable and able to cope with a progressive enlargement of the number of clearing banks.

Accordingly, a decision was taken by an Extraordinary General Meeting of the EBA on 20th March 1987 to include 25 more clearing banks within a year, and, for the next enlargement in 1988, to offer a quota of 20 % of total seats to non-EC clearing banks.

By the same, a draft t new agreement with the BIS was adopted and signed on 30th April 1987. In the meantime 24 new clearers were designated (annexed list) to be progressively included at a rate of approximately 3 new banks per month until end of February 1988.

With the achievement of the enlargement, the Ecu clearing is bound to become a truly Europe wide clearing system, linking directly together the major banks from each EC country and beyond.

This unique payment infrastructure supports decisively the Ecu's role as a European and international invoicing currency, thus adding to the Ecuís advantage as a common reference currency the advantage of payment handling efficiency. Furthermore, a decision was taken to convert the clearing system into a "same-day-value" system by the end of February 1988.

Accordingly, payments netted on day D will be settled for value on the same day D (whereas so far it is next day value or D + 1). For continuity reasons, the timing of the daily clearing process will remain unchanged in a first stage (i.e. 13-00; 14.30; 15.00). Consequently and upon assessment of the experience with the new system, the cut-offs may be shifted towards the end of the day.

The enhancement to a "same-day-value" clearing puts the Ecu clearing in a very competitive position vis-à-vis other national systems. Customers and correspondents throughout Europe and the world will be able to instruct their clearers until at least 11.00 a.m. to make payments over all of Europe for value that day.

It is obvious that until recently the major obstacle to this enhancement was to be found in the need to keep up the option of resorting to component currencies, for buying intra-clearing Ecus from another clearing bank (between preliminary and final cut-off time).

In the light of the experience gained so far with the recently implemented component currencies exchange system, a technically viable alternative to this option has been developed. However a long term solution to the problem of Ecu liquidity supply inside the clearing should certainly be envisaged in the broader perspective of a future linking between the "private Ecu" and "official Ecu" circuits. The discussion on this aspect of the clearing however goes beyond the framework of this article. Still, in order to conclude this short description, it is worth pointing out that the design of the system and the way it is operated today, does not hamper any attempt to further develop and adjust the clearing to changing requirements of the financial world.
 

IV - THE ECU BANKING ASSOCIATION (EBA)

The EBA was founded in Paris on 17th September 1985 by 18 commercial banks and the European Investment Bank which previously met as an ad hoc working group to elaborate the functionalities of an Ecu clearing system and the by-laws of a banking association.

The prime purpose of the EBA at its very beginning was, of course, the setting-up of the clearing system by implementing a clearing agreement signed with the BIS on 21st March 1986. To that effect, seven clearing banks (5) were mandated by the Constituent Meeting, which eventually formed a Clearing Committee within the EBA in order to monitor the functioning of the new clearing system, operating since lst October 1986. In the light of this experience a new clearing agreement was signed with the BIS on 30th April 1987.

The setting- up and running of the clearing, however, is not the only purpose of the EBA. The founding banks have adopted two more aims for the EBA :

- to promote transactions in ECU,
- to represent its members in all matters concerning the use of the ECU in their relations with national, European and international authorities.

Particularly with regard to the latter aim, and having now 80 member banks coming from all EC-countries, as well as the United States, Japan, Switzerland and Scandinavia, the EBA has undertaken to develop its profile as a bankers' professional association.

To that effect, the EBA has recently set up in addition to the Clearing Committee further four technical committees:

These committees are composed of highly reputed professionals from the various countries of the EC and beyond, with the aim to analyse and discuss Ecu related problems and developments in their respective areas.

With this profile, the EBA endeavours to contribute actively to the development of the Ecu in its role as the European currency.
 
 

January 1988


 
 

Foot notes

(1) Crédit Lyonnais, Kredietbank NV, Morgan Guaranty Trust Company Brussels, Lloyds Bank and San Paolo Bank.

(2) The EBA was founded on 17th September 1985 by the 18 commercial bank members of the ad hoc working group.

(3) Long position : claims larger than liabilities; short position : liabilities larger than claims.

(4) These EIBOR (Ecu Interbank Offered Rate) and EIBID (Ecu Interbank Bid Rate) rates are derived from the BID and OFFERED rates of the component currencies in the euromarket.

(5) Banque Bruxelles Lambert, Crédit Lyonnais, Generale Bank, Kredietbank Brussels, Kredietbank Luxembourgeoise, Lloyds Bank and San Paolo Bank.
 
 

Annexe I

The EBA is directed by an Executive Committee composed of the following persons

- Chairman : Dominique Rambure, San Paolo Bank,
- Deputy Chairmen : Thierry Lambrecht, Banque Bruxelles Lambert - John van Schil, European Investment Bank.
- Members : Leonard Dewes, Lloyds Bank - Liam P.Doyle, Allied Irish Banks - Marinus Huizer, Algemene Bank, Nederland - Olivier Mas, Crédit Lyonnais - Horst Peters, Deutsche Bank - André A.L. Swings, Kredietbank NV.
- Secretary General : Gilbert Lichter

Address : 4 rue de la Paix, 75002 - PARIS,
 
 

Annexe II

List of participating banks in the clearing and settlement system

Since October 1986

Banque Bruxelles Lambert S.A.
Crédit Lyonnais
Générale de Banque
Istituto Bancario San Paolo di Torino
Kredietbank S.A. Luxembourgeoise
Kredietbank N.V.
Lloyds Bank Plc

Since July 1987

Banque Nationale de Paris
National Westminster Bank Plc
Banca Nazionale del Lavoro

Since August 1987

Banque Européenne d'Investissement
Banca Commerciale Italiana
Barclays Bank Plc
Société Générale

Since September 1987

Privatbanken A/S, Copenhagen
Swiss Bank Corporation, London

Since October 1987

Banco di Roma
Caisse d'Epargne de l'Etat, Luxembourg
Morgan Guaranty Trust Company of New York,
Brussels

Since November 1987

Allied Irish Banks Plc
Banco de Bilbao
Banque Paribas
Deutsche Bank AG
Midland Bank Plc

Since December 1987

Algemene Bank Nederland N.V.
Union Bank of Switzerland, London

Since January 1988

Banque Internationale à Luxembourg S.A.

From February 1988

Amsterdam-Rotterdam Bank N.V.
Cîtibank, N.A., London
Commerzbank AG
Dresdner Bank AG