The Euribor – ACI Short Term European Paper Task Force (ACI Step) has published its recommendations for the development of the pan-European market and received recommendations from interested parties. As a result of this feedback, it will be holding a meeting to create an ACI Short Term European Paper Enlarged Task Force on March 11, 2003.
“We seem to have created recommendations that reflect how the market feels, but we recognise the need to put together a large working group for a really in-depth brain-storming session. From this we will create a set of recommendations that are truly representative of the market,” says Thierry Roland, chairman of ACI Step Task Force. “Once we have consensus, we hope that the European Central Bank (ECB) will take the project on board to get it green lighted and relay the request to the European Commission to get them involved on issues such as taxation.”
The task force was set up in July 2001, under the leadership of Euribor-ACI, to assess the reasons for what it defined as the insufficient level of development and integration of the short term securities market in Europe. ACI Step worked in parallel with the European Financial Markets Lawyers Group (EFMLG), a group of senior financial lawyers active in European commercial banks, which carried out a review of the legal situation for short term securities.
The EFMLG report, The Money Market: Legal Aspects of Short Term Securities, gave detailed information on the various existing markets in terms of legal environment and market developments. It is described as an important complement to the work done by ACI Step, and was summarised in the latter’s report, The Short Term Paper Market in Europe: Recommendations for the development of a pan-European Market, which was published in September 2002.
The Current Situation
The reasons for the diverse development of the short term paper market in Europe were defined in the report as: differences of legal systems across the euro area; the lack of a single settlement system; the lack of homogeneity of the features and the terms and conditions for these securities and a limited investor demand, which is still segmented on a national basis. “There is no comprehensive EU-wide regime addressing the substantive arrangements relative to short term securities such as commercial deposits and commercial paper (CP),” the report states.
Of the 12 euro-area markets, only France is defined as having a large domestic market for commercial paper, a result of it having the most similar characteristics to the US. “The French commercial paper market increased by almost 50% in size during 1999 alone and by almost 40% again during 2000,” the report continues. “Issuance was fairly stable in 2001 which, taking into account cyclical conditions, may be interpreted as a continuation – albeit at a possibly slower rate – of the impressive growth of the previous years.”
The French market has two advantages, according to the report. Primarily the involvement of the Banque de France, which helped the creation of the legal environment for short term paper, acts as a weekly supervisor and provides weekly statistics. The size of money market funds in France, representing almost 50% of the European market, also favours the French market.
The outstanding amount in the French market for corporate issuers (issued in all currencies by domestic and non-domestic issuers) stabilised around ?73 billion between the end of June and the end of August 2002. These levels are in line with those of autumn 2000 and were reached because of a 20% contraction registered between March and June 2002. This was the first significant reduction of the French market, which had more than doubled between January 1999 and June 2001 before stabilising between ?80-90 billion. It peaked at ?90.2 billion at the end of November 2001, the report states.
According to ACI Step’s consultation report, the task force’s investigations suggest a good potential for the development of the European short term paper market. It also makes nine recommendations to encourage the development of the market. “To achieve a better integration of the domestic markets and to reach a critical mass as a key factor of success in a more harmonised market, the recommendations of the task force ask for a more favourable environment in terms of flexibility, distribution and cost,” it states.
The first recommendation is for a harmonised information memorandum, suggesting that all domestic markets use a standard format for CP with an English translation. As the report points out, most of the markets studied already provide the information it suggests in their local information memorandum, and as a result the recommendation mostly relates to standardising the format coupled with the use of English.
Following on from this, the second recommendation is that the English version of the information memorandum should be available at the ECB, and that a yearly review should be carried out to keep it up to date – although this does not imply any involvement of the ECB in a credit approval of the issuers.
This recommendation, and others following, invites the ECB and individual national central banks to play an important function in the organisation and functioning of the market. The report gives four reasons for pushing this enhanced role: The involvement of the Federal Reserve Bank and the Banque de France is seen as key to the creation of successful markets in the US and France; the existing organisation of the ECB is an efficient way to ensure a homogeneous organisation of the European short term paper market; short term paper is part of the money market, and as such is of natural interest to the ECB, added to which 66% of the market is now constituted of bank issuers and banks usually act as a dealer for all short term paper. Finally, as stated earlier, Banque de France is already playing the role in the French market.
The third recommendation is that a primary index on short term paper issues, calculated by the ECB, is created to improve the transparency of the market. This would provide valuable information to issuers, dealers and investors in the market at a European level, and would therefore contribute to the development of a pan-European market.
The fourth recommendation is that the ECB should be in charge of collecting and publishing statistics on the Step market as well as the elaboration of indices. To achieve this, the task force is now working on establishing the level of detailed data needed as a minimum requirement, defining what is priority from the current sources of information and creating an implementation plan.
The task force recommends that euro short term paper should be eligible as Tier 1 where it achieves a minimum rating of A2/P2 or equivalent and is issued or guaranteed by entities established in the European Economic Area. It also recommends that paper should be classified in the same way in each transposition of the Undertakings for Collective Investment in Transferable Securities (UCITS) so that they can be purchased without restriction by UCITS, independently of the country, issuer or dealer.
Short term paper (with an initial maturity of less than one year) should be excluded from the European Commission’s proposed Prospectus Directive for financial services and its national transposition is the seventh recommendation. This is intended to ensure that the market is allowed to develop in a flexible regulatory environment.
The penultimate recommendation is that same day settlement should be possible for all domestic and cross border transactions. This does not necessarily require a unique clearing and settlement system, but it does require efficient bridges be established between a limited number of efficient systems.
Finally the report recommends that domestic legislators in the euro area adopt a common format for the market, and makes suggestions for what the format could be.
Feedback and Enlargement
The meeting of the enlarged task force will be based around the nine recommendations of the ACI Task Force as well as the EFMLG’s seven and a number of organisations have been invited to participate in the meeting of the enlarged group (see sidebar). “We should get around fifty participants,” says Roland. “The idea is to have the whole spectrum of the market involved in ACI Step.”
As Roland explains, the initial report of ACI Step was simply the first stage in the process. “This was a preliminary report only, and only represented the views of dealers,” he says. “What we want to achieve with the enlarged group is to create a report that is truly a representative view of the whole market which can then be relayed to the ECB in April.”
Based on the feedback so far, Roland is confident that the meeting will be a success and that the full report will be ready according to schedule. He is not complacent, however. “We could have a surprise,” he concedes. “Once we all sit down, views could be tremendously different from what we have expected, but I hope that we will be able to create consensus in the market about the best way forward.
“The feedback has been very positive, so the ECB has been looking at our proposals with interest,” he adds. “It has been as supportive as possible, but has not yet committed itself because it wants proof that we are completely representative of the market as a whole.”
Invited Participants of the Enlarged Task Force:
ACI Step Task Force
ACI national representatives
EFMLG Drafting Committee
European Central Bank
Economic Financial Committee’s Group on EU
Government Bonds and Bills
Committee of European Securities Regulators
European Association of Corporate Treasurers
Federation Europeenne des Fonds et Societes
European Central Securities Depositaries Association
IPMA ECP Committee
European Investment Bank
Capital Market Daily
Instituto de Credito Oficial
European Repo Council