TEXT - Fitch revises Clearstream Banking, Luxembourg outlook

Fri Feb 1, 2013 9:47am EST

(The following statement was released by the rating agency)
    Feb 1 - Fitch Ratings has affirmed Clearstream Banking, Luxembourg's (CBL)
Long-term Issuer Default Rating (IDR) at 'AA' and Viability Rating (VR) at 'aa'.
The agency has revised the Outlook on the Long-term IDR to Negative. A full list
of rating actions is at the end of this commentary. 

RATING ACTION RATIONALE

The affirmation of CBL's VR and IDRs reflects the bank's important franchise in 
international securities post-trade services, mainly settlement and custody, 
sophisticated IT systems, carefully managed liquidity and very low credit risk. 


The Negative Outlook reflects Fitch's view that the bank's exposure to 
operational risks, although well monitored, may be higher than was previously 
considered to be the case, as reflected in the preliminary US Treasury 
Department Office of Foreign Asset Control (OFAC) findings. The unpredictable 
nature of such risks could expose the bank to potentially large one-off costs. 
Operational risks are a key rating factor for CBL given the nature of its 
business.  

OFAC is considering whether to issue a civil pre-penalty notice on CBL as 
disclosed by Deutsche Boerse AG (DBAG; not rated) in January 2013. This relates 
to certain securities transfers undertaken by CBL in 2008 linked to the closure 
of Iranian customers' accounts given the imposition by the US of sanctions 
against Iran. DBAG confirmed that if OFAC issued a civil pre-penalty notice, 
based on current information available to OFAC, the amount of the potential 
penalty faced by CBL could be approximately USD340m. However, it could be lower,
pending finalisation of discussions with OFAC. 

The potential amount could be partly met through CBL's internal capital 
generation. However, it is significant relative to CBL's modest equity base. 
DBAG has indicated that it will provide all necessary assistance to CBL in order
to ensure that it is able to meet all its regulatory capital requirements. 

CBL is the principal operating subsidiary of Clearstream International (CI; not 
rated) which also owns Clearstream Banking Frankfurt, the German central 
securities depository. CI is in turn 100% indirectly owned by DBAG, through an 
intermediate holding company, Clearstream Holding AG (CH; not rated). CH is 
based in Germany and regulated by the German regulators. It was established to 
limit the potential for excessive up-streaming of capital from CBL and CI to the
ultimate parent. There are ring-fencing agreements in place which ensure that 
adequate capital is retained at CBL and CI.  

Fitch considers the ring-fencing measures effective. DBAG has committed to 
maintain EUR250m of minimum tangible equity at CBL and EUR700m at CI. However, 
CBL's creditworthiness cannot be completely separated from that of its ultimate 
parent DBAG. Should reputational issues arise at DBAG, this could affect 
transaction volumes at CBL.  

RATING DRIVERS AND SENSITIVITIES - VR AND IDRs

CBL's IDRs are driven by the bank's strong intrinsic creditworthiness. CBL's 
mature franchise in international securities custody and settlement provides a 
resilient revenue base. Its lending is almost entirely secured, very short term 
and only to facilitate settlement. The bank has never suffered a credit loss. 

Exposure to operational risk is high but has been well managed and CBL has a 
long track record of very low operational losses. Nevertheless, the entity's VR 
and IDRs are sensitive to these risks, as highlighted above. The VR and IDRs 
could be downgraded if the outcome of the OFAC procedure resulted in a material 
negative impact on the bank's earnings and capital base; if the amount was 
modest, Fitch may revise the Outlook back to Stable or it may consider rating 
action on the VR and IDR in the light of the extent of inherent risk in 
Clearstream's business. 

Ongoing pressure on earnings and a sustained reduction in transaction volumes 
could also put downward pressure on the ratings. In the context of the weak 
global economic environment, Fitch expects limited volume growth in the 
foreseeable future. However, management's initiatives in widening of the bank's 
product range, in particular in the collateral management or around the 
TARGET2-Securities settlement platform, may help offset the risk of lower 
volumes. 

The ratings are also sensitive to new regulations that might potentially 
endanger its business model, as the interplay between them is complex, but Fitch
does not view this as pressing. 

Upward rating momentum is unlikely given CBL's high rating levels.  

RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

CBL would first look to DBAG for support. However, Fitch believes CBL is a bank 
for which there is an extremely high probability of external support from market
participants and ultimately the Luxembourg authorities. This reflects its major 
role as market infrastructure in post-trade international bonds custody and 
settlement in Europe.

The Support Rating and Support Rating Floor are potentially sensitive to any 
change in Fitch's assumptions about the ability (as reflected in its ratings) or
willingness of the Luxembourg authorities to provide timely support to the bank,
if required or if CBL's key role in providing post-trade services were to 
diminish. This is not the agency's base case.  

The rating actions are as follows: 

Long-term IDR: affirmed at 'AA'; Outlook revised to Negative from Stable
Short-term IDR: affirmed at 'F1+'
Viability Rating: affirmed at 'aa'
Support Rating: affirmed at '1' 
Support Rating Floor: affirmed at 'A-' 
Commercial Paper: affirmed at 'F1+' 

 (Caryn Trokie, New York Ratings Unit)
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