Tuesday, October 20, 2009

Should Clearstream, Euroclear have this influence?

Underneath our last blog, we received an important comment from Jérôme Turquey in Luxembourg. We reproduce a slightly truncated version here.

"A trial is currently taking place before the French court. It involves a Luxembourg-based Company that is called Clearstream. Clearstream is a clearing house like its competitor Euroclear.

It is amazing to observe that both clearing houses are located in secrecy jurisdictions: according to TJN, Luxembourg is scored 87% secrecy and Belgium is scored 73% secrecy. Clearing is an activity of general interest for the international financial sector.

As Clearstream explains on its website, the world's entire financial system is built on trust. When assets are traded, both parties must be sure they will receive their part of the transaction. Given the complexity, speed and quantity of assets involved, a fast, secure and trusted third-party is absolutely essential for settling transactions. The business of a clearing house is therefore to ensure that cash and securities are promptly and effectively delivered between trading parties. It also manages, safekeeps and administers the securities that it holds on behalf of its customers.

It results that every financial flow uses such services including pure criminal flows, evasion flows...

The question is: should such services be born by the private sector?

I would say definitely no, especially if there is a weak regulation in the jurisdiction where the clearing house is located.

As far as Luxembourg is concerned, professionals of the financial sector admit they have a very close and direct say on the evolution of the Luxembourg prudential regulatory environment and that this influence has been exerted directly and indirectly by the lobbying initiatives taken on the level of the different professional associations, be it ALFI or ABBL, but also and more importantly, through a direct association with the Luxembourg Supervisory Authorities by means of a number of standing committees (Cf. Rafik Fischer, « Shaping the regulatory environment ». Fundlook, July 2005, page 6.)
. . .
I do not think this is the regulated entities’ role to have a very close and direct say in the evolution of the Luxembourg prudential regulatory environment . . . and to exert, directly and indirectly, lobbying initiatives. Such “close and direct say” and “influence” and “direct association" apply not only for the regulator but also for the parliament (many members of parliament are business lawyers)."

Read the full comment under our blog, and a more detailed set of arguments in Turquey's recent blog Clearing the Clearing, Regulating the Regulator.

It is reminiscent of the role of the International Accounting Standards Board (IASB), another private body which we have commented on before:

"The International Accounting Standards Board (IASB) is a curious organisation that decides how companies publish their company accounts. Despite its grand-sounding name, the IASB – which takes decisions that will profoundly affect all of us – is a wholly private company based in London and registered in the American secrecy jurisdiction of Delaware. It is funded by the Big Four accountancy companies and by some of the biggest multinationals in the world. In effect, this private company, which is subject to no democratic processes, is writing some of our most important laws. We are not talking about "soft" laws like guidelines or codes of conduct -- but hard European law. In the past, the latest accounting standard would simply have been nodded quietly through, and it would become law. But a few activists have noticed what is happening -- and they are alarmed."

As Professor Prem Sikka noted before:

"The objective of financial reporting should be amended by the due process of law and parliamentary scrutiny rather than through the private processes of the IASB"

Back to Turquey: year ago we also wrote briefly about Clearstream, saying that

"Denis Robert, who was inundated by lawsuits after the publication of his book Révélation$ (about the Luxembourg based financial clearing house Clearstream, “which operates in more than 100 countries, including 40 tax havens”) on why he is throwing in the towel. “It is a victory for Clearstream, its lawyers, its leaders, its bankers, and its board. A victory for censorship.”

This is an exceedingly important point. Unfortunately, the link we provided in that short article has now been killed, as a result of legal pressure.


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