LuxCSD offers a wide range of securities services including settlement, custody and issuance of securities, significantly boosting the efficiency and security of the Luxembourg financial market. LuxCSD CEO and board member Marco Caligaris, who also serves on the boards of the European Central Securities Depositories Association (ECSDA) and the Luxembourg Capital Markets Association (LuxCMA), provided an in-depth overview of LuxCSD’s innovative strategies and future plans to remain competitive and resilient in an ever-evolving financial landscape.
Kangkan Halder: Can you share some insights into LuxCSD’s inception and the primary goals at the time of its establishment?
Marco Caligaris: LuxCSD, the Luxembourg central securities depository (CSD), was launched in 2010 with the primary goal of enhancing Luxembourg’s financial market infrastructure. CSDs provide efficient and secure settlement and custody services for a wide range of securities, including bonds, equities and investment funds.
Luxembourg, being a significant hub for investment funds and financial services, required a robust and modern CSD to handle the increasing volume and complexity of securities transactions. Another main driver was enhanced integration of Luxembourg in the European capital markets landscape and compliance with comprehensive regulatory requirements. Back then, it was the time of mammoth projects like the creation of the ECB’s pan-European settlement platform T2S and the introduction of the European Market Infrastructure Regulation (Emir). A well-integrated infrastructure was essential for the competitiveness of Luxembourg’s capital market.
As a CSD authorised under the central securities depositories regulation (CSDR) in 2020, what are the main regulatory requirements LuxCSD must adhere to, and how do you ensure compliance?
The CSDR imposes several key regulatory requirements on CSDs designed to enhance the safety, efficiency and transparency of securities settlement and custody operations across the European Union. Requirements include, for example, providing fair and open access to services for all market participants, ensuring non-discriminatory treatment. To ensure transparency, CSDs maintain accurate and comprehensive records of all transactions and provide regular reports to regulatory authorities.
CSDR also has a big focus on robustness of markets, for example when it comes to settlement discipline or to maintain sufficient capital to cover risks associated with operations, as well as to implement comprehensive risk management frameworks to manage credit, liquidity, operational and other risks.
The compliance with these regulatory requirements is monitored by regular internal audits and assessments. By adhering to these regulatory requirements, LuxCSD ensures the integrity, efficiency and reliability of its securities settlement and custody services.
One of our greatest assets is our flexibility and our tailor-made approach to clients.
LuxCSD offers a range of services including settlement, custody and issuance. Can you elaborate on these services and explain how they support the Luxembourg financial market?
A central securities depository like LuxCSD is the start and end point of a securities transaction.
Before a security can be traded, it has to be issued in a CSD. The CSD takes care of the issuance and custody of the global certificate, in physical or electronic form. In this way, companies and governments worldwide can raise capital efficiently. Each security gets a unique identification number, an ISIN. This proper identification of securities makes it easier for investors to trade and invest in Luxembourg-issued securities.
After trading, once buyer and seller have reached an agreement, the CSD processes the actual transfer of securities and money to the securities accounts at the customers’ banks, the so-called settlement. LuxCSD offers settlement services for both domestic and cross-border securities transactions. Transactions are settled in real-time, reducing settlement risk and enhancing the efficiency of the financial market.
Following settlement, LuxCSD holds the securities securely in its vaults on behalf of the customer and also oversees further actions while the security is in the vault, known as asset servicing, such as dividend payments, interest payments or tax services.
In together, running a stable, fast and central infrastructure, LuxCSD strengthens the overall infrastructure of the Luxembourg financial market.
What are the key competencies of LuxCSD that distinguish it from other central securities depositories in Europe?
Being a comparatively small CSD, one of our greatest assets is our flexibility and our tailor-made approach to clients. At the same time, we offer a comprehensive service range, strong regulatory compliance and risk management, backed by our position within Clearstream as a bigger organisation. This is a unique set-up in Europe.
Another major competitive advantage for LuxCSD is our strategic location in Luxembourg, at the heart of the European Union. Luxembourg is an international leader in debt capital, a key hub for securitisation and structured finance vehicles, as well as an acknowledged platform for hosting landmark international IPOs. It provides a comprehensive ecosystem, with regards to regulation and is home to numerous fintechs and top players in the financial industry, fostering innovation in digital finance.
DLT and blockchain provide immutable records of transactions, enhancing the security and transparency of settlement processes
LuxCSD is owned by Clearstream, which in turn is fully owned by Deutsche Börse. How does this ownership enhance LuxCSD’s capabilities and service offerings?
The ownership of LuxCSD by Clearstream and Deutsche Börse creates a perfect balance between the advantages of a smaller company with the backing of a global group. LuxCSD has close to 20 employees located in Luxembourg. Being able to closely work with over 2,500 Clearstream colleagues in 12 locations worldwide provides a perfect resource of specialised product and market knowledge, financial backing as well as access to latest technology and in-depth training capabilities.
The close collaboration allows LuxCSD to offer a wide range of services that cover the entire securities lifecycle, from issuance to settlement and custody, and access to around 20 markets globally.
Furthermore, access to state-of-the-art technological infrastructure and systems ensures high levels of efficiency, reliability and security in settlement, custody and issuance services. Next to “everyday” systems, this includes the digital securities platform D7, which is a first of its kind and supports mass digital issuance for securities.
What are your main considerations to remain at the forefront of the securities market infrastructure, such as integrating technologies like blockchain and distributed ledger technologies into your operations?
Innovation is one of the key pillars of Deutsche Börse Group’s growth strategy. Our ambition at LuxCSD is to actively shape the transformation towards digital financial markets. The adoption of new technologies plays a pivotal role in this endeavour.
DLT and blockchain provide immutable records of transactions, enhancing the security and transparency of settlement processes. By integrating DLT, LuxCSD can offer clients greater confidence in the integrity of their transactions. Using “smart contracts” on a blockchain can automate and streamline various aspects of the settlement process, reducing manual intervention, cost and the potential for errors. LuxCSD aims to leverage DLT to tokenise traditional securities, allowing for more flexible and efficient trading and settlement. Tokenised assets can be traded in smaller fractions, enhancing liquidity and accessibility. We also provide clients with advanced digital platforms that offer real-time access to their accounts, transaction statuses and analytics.
While new technologies bear the promise of improved financial markets, we integrate advanced cybersecurity measures to ensure resilience from the beginning. Advanced technologies support robust disaster recovery and business continuity planning, ensuring that LuxCSD can maintain operations in the face of unexpected disruptions.
Speaking of settlements, LuxCSD is one of the six market operators participating in the European Central Bank’s exploratory work on wholesale settlements using DLT. Could you provide some insights into this development and what LuxCSD’s main contributions to this effort are?
The ECB trials are a major step towards exploring the use of a digital euro and digitising financial assets. LuxCSD is joining forces with Clearstream and the digital D7 post-trade platform to participate in this project. We aim to gain and create insights for a digital capital markets ecosystem. We already provide the digital securities processing part; a digital euro would represent the cash side to a digital securities transaction.
Most importantly, Clearstream and LuxCSD are now adding DLT capabilities to D7, delivered in collaboration with our partners at Google. With the ECB trial transactions, we will therefore deploy digitisation as well as tokenisation possibilities for real-world assets across multiple jurisdictions.
LuxCSD, in their role of “Market DLT Operator,” will enable the tokenisation and DLT-operated settlement of digital assets under Luxembourg law.
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With the increasing focus on digital assets and cryptocurrencies, how is LuxCSD preparing to support the custody and settlement of these new asset classes?
Luxembourg provides a comprehensive ecosystem, with regards to regulation and being home to numerous fintechs and top players of the financial industry, fostering innovation in digital finance. LuxCSD very much welcomes the local legal framework to facilitate the use of DLT in the financial sector introduced with the Luxembourg Blockchain Act. Starting with the ECB trials, LuxCSD will effectively expand the D7 platform to Luxembourg allowing the issuance of instruments on-chain directly.
We recognise the potential importance of DLT in the financial sector and aim to attract innovative issuers and investors by offering a reliable and future-proof infrastructure for their issuance, settlement and custody activities.
Looking ahead, what strategic initiatives or projects is LuxCSD focusing on to strengthen its position in the Luxembourg financial market and expand its influence across Europe?
Our strategic focus lies in automation, harmonisation and sustainable development. I already talked about our ambition to automate and digitise financial markets.
One prerequisite is the integration and harmonisation of systems and entire markets. We have been taking a leading role in market projects such as the T2S initiative to improve settlement efficiency and interoperability among European CSDs and European Collateral Management System (ECMS) integration. We also continuously establish strategic partnerships to enhance our service offering. Another key focus for LuxCSD is sustainable finance, reflecting the growing importance of environmental, social and governance (ESG) criteria in investment decisions and the capital markets ecosystem.
We are looking to build on our unique position as flexible boutique CSD with the backing of a well-known international market infrastructure to bring our clients the best of both worlds.
