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Euroclear
Where the central banks park their billions
The EU is discussing the frozen Russian billions again. At the center is the Euroclear institute, where the funds are blocked. What kind of institution is this that central banks entrust their money to?
The Boulevard du Roi Albert II in Brussels is not a well-known address in world politics. But he has moved to the center of geopolitical world events. Because this is where Euroclear is located, a financial institution to which central banks entrust billions. An institute that hardly anyone in the general public knew about.
According to EU information, around 185 billion euros of Russian central bank reserves are stored here, which were frozen by the European Union as a result of the sanctions. Russia speaks of illegal confiscation and has therefore sued Euroclear in Moscow. The EU rejects the lawsuit as speculative and unfounded.
A huge one international depot
Euroclear is not a classic bank, but a financial institution with a special function: a so-called central securities depository, or CSD for short. As such, Euroclear holds assets worth more than 40 trillion euros.
You shouldn’t imagine that thick bundles of money are stored behind even thicker safe doors. It’s about digital assets such as government bonds, money market instruments or account balances in foreign currencies. Not only do they have to be stored, but they also have to be tradeable internationally – many functions that the Belgian institute fulfills.
“Euroclear is a central market infrastructure for the custody and settlement of securities”says Klaus Nieding, investor protection lawyer and expert on the international financial markets. To put it simply: It works like an international securities depository.
A safe place
Euroclear ensures that transactions between market participants are carried out in a technically clean manner and that ownership rights are legally clearly assigned. “You can imagine a depository like a land register”explains Michael Grote, banking professor at the Frankfurt School of Finance. The securities are deposited there. Euroclear takes care of them and knows who they belong to.
Commercial banks, large investors and central banks use Euroclear as a reliable infrastructure. Central banks keep their reserves abroad in order to remain internationally solvent.
How secure is a highly networked system?
Euroclear is considered safe, where safe means: “highly regulated, closely monitored and designed for resilience”said Nieding. Several national and European supervisory authorities monitor Euroclear – including the National Bank of Belgium, the Belgian Financial Markets Authority FSMA and also the European Central Bank (ECB).
The IT infrastructure is also particularly secure, explains banking professor Grote. “Their computer systems are among the most secure in the world.” They are at secret locations, several of them working in parallel.
Nevertheless, security is a relative concept. As a financial market infrastructure, Euroclear is networked with many banks and financial institutions. “There is never one hundred percent security in highly networked systems”says Nieding.
An oligopoly – a lot of money in a few hands
Without custodians, cross-border trading would hardly be possible. Although it is only a small, illustrious circle: there is Euroclear in Belgium, Clearstream in Luxembourg and the DTCC in the USA. With a good 20 trillion euros in assets under management, Clearstream is half the size of Euroclear, while the Americans manage by far the largest amount with over 86 trillion euros.
This trio acts as the essential nervous system of securities trading, without which trading would collapse within seconds. In other words, it is a small global oligopoly. “The industry is extremely concentrated”explains Nieding.
Systemically relevant – and strictly monitored
The small number of custodians makes them vulnerable: “Euroclear is highly systemically important”says banking professor Grote. This leads to high efficiency and low costs, but also a risk if something goes wrong.
The failure of a custodian could have a severe impact on international financial markets. “This is a classic too-important-to-fail area”says Nieding. Because in an emergency there are hardly any alternative options. Cyber incidents or legal risks could have system-wide impacts very quickly.
Russia case as a stress test
But the current debate is not about IT security, says Grote, “but about the political risks emanating from Europe today”. Specifically, it is about the use of frozen Russian assets, which are stored at Euroclear and are to be used by the EU to support Ukraine.
Belgium is blocking the release. Financial experts also view this critically because trust in the European financial center is at stake. For Nieding it is therefore “a clear stress test for trust in Europe as a location”.
Europe an uncertain candidate?
The reason: Other central banks could become more sensitive about where they keep their reserves – and under what legal conditions. “”We’re looking around the world for alternatives,” says Grote. In the short term it would be bad, but in the long term they could be better “Buy Chinese or Indian securities instead of continuing to buy European bonds. Europe may have turned out to be an uncertain candidate here.”
Euroclear is not a political actor, but its role as an international clearing house and financial market infrastructure has inevitably made it part of geopolitical tensions. The debate shows that a financial institution can become a political lever – even if it was originally intended simply to ensure the international flow of money.
