Eurex Clearing AG (Eurex Clearing) and Clearstream Banking Luxembourg S.A. have announced that, subject to regulatory approval, a central counterparty clearing service ("CCP") for securities lending transactions will be introduced in the second quarter of 2009.
Securities lending transactions typically involve the transfer by a lender of full legal and beneficial ownership of certain securities (government bonds, gilts equities) to a borrower in return for the payment of a fee and the provision of collateral (cash or other securities). The borrower of the securities is obliged to return those securities (or equivalent securities) on demand or at the end of a pre-agreed term. In such lending transactions, there is a credit risk to the lender that the borrower will be unable to complete the transaction due to issues such as insolvency.
The introduction of the CCP will remove this element of risk to the lender as the CCP will be able to complete the transaction in the event that a borrower is unable to do so. The CCP initiative aims to establish a European standard for securities lending transactions via a central counterparty, rebuild confidence in the lending industry and assist in stabilising the markets by mitigating counterparty risk.