European international central securities depositories (ICSDs) have coped well with pandemic-related market volatility thanks to ample latency in transaction systems, strong risk-control frameworks and limited exposure to short-term collateralised credit risk, according to Fitch Ratings.
The credit rating agency noted that the first impact of market volatility (since early March) on ICSDs has been a sharp increase in settlement transaction volumes, which “should ultimately support the profitability of ICSDs”.
The two European ICSDs are Euroclear Bank which Fitch rates as AA+/Stable and Clearstream Banking SA rated as AA/Stable. In March, Clearstream reported 15 percent year-on-year increase securities financing activity, along with a 3 percent increase year-on-year in securities deposits. These upticks contributed to the ICSD seeing a 61 percent year-on-year increase in the number of transactions in March.
Meanwhile, Euroclear also had a strong first quarter, with revenues up 9 percent year-on-year, to hit €383 million. This included a 15 percent year-on-year increase in business income for Q1, which was recorded at €321 million and was largely driven by the increased activity of during the volatility.
The revenue of ICSDs primarily relates to net fee income from assets under custody, settlement transactions, securities lending and collateral management.
As a result, Fitch suggested that ICSDs' earnings and profitability will not be affected by those factors that will affect commercial banks, such as increasing impairment charges or reduced lending volumes.
However, Fitch added that net interest income will come under pressure from lower base rates.
Elsewhere, Fitch noted that the exposure of ICSDs to a potential deterioration in European sovereign credit profiles is “materially less pronounced than for most other financial institutions”.
The credit profiles of these financial market infrastructures are partly countercyclical to the credit profile of the respective sovereign, as there may be increased trading activity during periods of stress, Fitch explained.
Moreover, the agency said that neither Euroclear nor Clearstream has significant exposure to its country of domicile in Belgium or Luxembourg, respectively, and therefore safe from knock-off effects from future negative rating reviews.
