Custody is built on neutrality, trust and legal certainty, yet the EU’s push to tap frozen Russian assets is testing those foundations. Karel Lannoo, head of Brussels-based think tank Centre for European Policy Studies (CEPS), walked us through structural flaws of the EU plan to custody’s business model, and how an SPV could shield it.
Anyone driving down Boulevard du Roi Albert II in Brussels could easily miss it: the long glass façade at No. 1 blends neatly into the city’s business district. Yet, behind that understated exterior, sits a systemically important financial plumbing that keeps markets functioning. Euroclear safeguards trillions in securities and collateral, processing vast cross-border flows that underpin global markets. Its purpose is simple: to protect assets and maintain trust and neutrality.
But today, Europe’s financial market infrastructure finds itself pulled into the centre of a geopolitical storm. The EU’s original proposal to raise a “reparations loan” for Ukraine by leveraging the full principal of immobilised Russian sovereign assets held in custody at Euroclear has forced a fundamental question: when politics intrudes on the post-trade system, who safeguards the safe-keepers?
When building logic meets political logic
To understand the stakes, Lannoo argues, it helps to borrow a metaphor from the world of infrastructure finance. When governments build or rebuild bridges, airports or energy grids, they don’t load the risk onto the operators or developers who keep the system running. They create a separate SPV, a ring-fenced vehicle designed to absorb construction risk so the underlying infrastructure remains stable.
“You create an SPV where you accrue the returns on the assets you have invested, and the overall structure remains untouched,” Lannoo says. “That’s the whole point: you don’t touch the underlying assets.”
The same logic, he argues, should apply here. Ukraine is the infrastructure that needs rebuilding. Europe’s custody system is the infrastructure that needs protecting. “You cannot have a claim on the underlying assets within Europe’s posttrade system – that is a risk for Euroclear, a risk for the stability of the system, and a risk for the European financial system.”
Why the EU’s proposal clashes with custody
The Commission’s reparations loan structure would have borrowed against the entire principal of frozen Russian assets, even though the EU cannot legally confiscate them. Lannoo is direct about this: “The legal ground is extremely shaky — as long as the EU doesn’t declare war on Russia, it cannot confiscate these assets.”
The CEPS’s policy brief sets out the consequences for custodians. The Reparations Loan creates two distinct risk channels. First, it introduces a sizeable liquidity and refinancing risk for institutions such as Euroclear. Russia’s central bank is now suing Euroclear for the return of its frozen reserves, underscoring the brief’s warning that the custodian could face claims of around €200 billion if sanctions were lifted before any repatriations are paid. Because the original cash balances would have been transformed into a loan to the EU and already disbursed to Ukraine, Euroclear would be left holding a liability without the corresponding assets, a scenario that litigation now brings into sharper focus.
Second, the design leaves Belgium legally and geopolitically exposed. Because custodians retain full liability towards the Russian Central Bank, Belgium becomes the primary jurisdiction vulnerable to legal claims, operational disruption or retaliatory measures. With Euroclear sitting at the centre of the global financial architecture, the brief warns that the proposal effectively turns Belgium into the EU’s geopolitical pressure point – a role it was never meant to play.
These risks echo the concerns Lannoo raises: liquidity drains if sanctions shift or litigation emerges; operational exposure if Russia retaliates; concentration of liability on Belgium, which still has a bilateral treaty with Russia; and legal uncertainty that could undermine trust in EU custody. And the political contradictions are not lost on him: “The Commission says the EU is a ruleoflaw union, and then does exactly the opposite.”
EU rethinks
On 19 December, EU leaders dropped the reparations‑loan concept entirely after member states balked at the legal and financial exposure it created. As reported by Yahoo News, leaders opted instead for an EU‑backed loan raised on the markets. The bloc will now issue €90 billion in joint debt to support Ukraine, without touching the €210 billion in immobilised Russian assets. Fitch responded by affirming the custodian’s rating at AA with a Stable Outlook, removing it from Rating Watch Negative.
The agency had previously warned that the EU plan introduced material legal and liquidity uncertainties. In other words, the proposal risked destabilising the very infrastructure that keeps European markets functioning.
The politics behind the pressure
CSDs sit at the intersection of sovereignty, collateral and financial stability. In a previous article, Lannoo explained how in Europe’s CSD puzzle, the trust pieces outweigh the competitive pieces, and how the stakes between member states and the infrastructures they regulate are unusually high.
France is a case in point. Lannoo notes that it has not fully accepted how its former national CSD, Sicovam, was absorbed into Euroclear when Euronext was created. That resentment still shapes French behaviour today, especially now that the Russian sovereign assets sit in Brussels. France’s recent decision to take a more assertive public stance on its own frozen Russian assets is widely read in Brussels as a political signal – a way of reminding Belgium that Paris has options, and of positioning itself should Euroclear come under strain.
“Member states want to keep control of the assets – if French assets are located in Belgium, that is not fun for France,” Lannoo says, linking France’s posture directly to the location of Euroclear’s parent. “There are always double agendas. France never digested that Sicovam became part of Euroclear.” This political backdrop makes the Commission’s proposal even more combustible.
The SPV alternative and how it addresses risks to custody operations
CEPS’s proposed solution is to treat Ukraine reconstruction the way infrastructure finance treats any major build: use a separate SPV.
In infrastructure finance:
- The SPV is the construction site – where the risk lives
- The operator stays protected — so the system keeps running
- The cashflows, not the underlying asset, secure the financing
Applied to frozen Russian assets:
- The SPV would securitise only the extraordinary revenues, not the principal
- The custodian remains neutral, insulated and operational
- The EU avoids setting a precedent that undermines trust in its posttrade system
Lannoo explains the mechanics: “You can optimise it with an interestrate swap – guaranteed by the sovereign – you could deliver €5 billion in the first year. That’s enough to build a €100 billion balance sheet with loans from the ESM.”
And the contrast with the Commission’s plan is stark: “The reparations loan is extremely complex – just to make sure you don’t touch the underlying assets but still use them.”
The bigger truth: you can’t rebuild one infrastructure by weakening another
Infrastructure finance solved this problem decades ago: build through a separate vehicle, protect the operator, and keep the system standing. Custody requires the same protection. Lannoo puts it plainly: “We can set up a structure much simpler than what is on the table now, and without destabilising the financial system.”
