The largest commercial paper volumes have traditionally been traded
domestically in the US, Japan and France. However, the international,
predominantly London-traded, euro commercial paper (ECP) market is now
growing the fastest.
Having outstripped France in terms of size, the ECP market is already
setting its sights far higher – competing with the largest of them all,
the US market. With a little regulatory help and an expected increase
in market demand, this may just prove possible.
“The ECP market is growing at about 25% per year. Although total
outstandings are currently slightly off the peak of $390bn in May – at
around $370bn – 2003 is yet another strong year in terms of growth,”
says John Ford, head of ECP origination at Deutsche Bank in London.
According to John Bulger, global head of CP origination at Deutsche
Bank in New York, the ECP market is beginning to attract more attention
because the disparity in size between the US and the euro market is
shrinking. “With total US outstandings at roughly $1.3 trillion, it
seems like a big gap, but it is closing,” says Mr Bulger.
Working in parallel
Mr Bulger says that there has been significant growth in the
asset-backed sector of the ECP market. This is in parallel to the USCP
market, where over the past decade asset-backed CP (ABCP) has gone from
a curiosity issuance to become the bulk of the market – now accounting
for over 50% of outstandings. “The supply of ABCP and investor
understanding of it has developed rapidly. ABCP is now the fastest
growing segment of the ECP market,” says Mr Bulger.
David DeMilt, executive director, ABCP origination, at Goldman Sachs,
agrees that the growing popularity and understanding of securitisation
is facilitating the growth of the asset-backed ECP sector. There are,
he says, two factors behind this.
First, many of the asset-backed ECP vehicles are buyers of term paper
or they help warehouse assets therefore increasing liquidity. Second,
traditional sellers to ABCP conduits have grown significantly in
Europe. “These sellers are increasingly using conduits for financing
purposes, rather than simply borrowing from the bank, because they can
achieve better rates,” explains Mr DeMilt.
David DeMilt: the creation of money market style funds in Europe is generating demand
The ECP market has also overcome the obstacle of needing more volume to
grow, but not being large enough to attract that volume. A number of
issuers have recently committed to the market on the basis that if they
are funding European assets, it’s easier for them to use the ECP
market, says Mr DeMilt. European issuers that have historically used
the US market are now keeping some of their funding here, while some US
issuers who usually swap for the foreign currency risk are using the
ECP market.
On the investor side, he says more money market style funds are being
created in Europe, thereby facilitating demand – certainly for
asset-backed ECP, not least because it tends to have more yield than
straight bank paper or equivalently rated corporate paper.
Sector growth
Despite this demand, growth in the asset-backed market, like the
overall ECP market, has stuttered of late. At September 30, the
asset-backed sector accounted for around $77bn, or 20% of the ECP
market’s outstanding, only slightly up from May 2003’s $76.4bn.
There is, however, room for optimism, according to Chris Withers,
managing director and head of short-term products, fixed income, at
Citigroup, who says the market exploded in May 2002 – rising from
$35.6bn to $55bn by 31 December. “Investors realised post-Enron that,
if they did their due diligence properly, SPV [special purpose vehicle]
didn’t have to be a dirty word and that it was better to buy
asset-backed, which is securitised, than unsecured paper that was being
rapidly downgraded.” Mr Withers says the market has reached a point
where the number of investors who put lines in place to buy
asset-backed has reached a plateau, and is now waiting for the next
push. “Everyone is convinced the asset-backed sector will continue to
grow, and if we continue to mirror developments in the USCP market,
then we will not be surprised to see ABCP accounting for more than 50%
of ECP issuance.”
There are two major challenges that need to be overcome for these
asset-backed volumes to be achieved, and indeed the whole ECP market to
compete more closely with the US – restrictive legislation and the lack
of a short-term market. According to Mr Ford, the prognosis is good on
both counts.
Regulatory effects
Mr Ford bemoans the fact that there has been too much investor
restriction in the past, with UCITS-governed (Undertakings for
Collective Investments in Transferable Securities) mutual funds in
continental Europe particularly limited in the amount they are allowed
to put into ECP. But things are changing: the European Central Bank
(ECB) has, as part of its role to develop the liquidity of money
markets, sponsored the Short-term European Paper (Step) Group. This was
largely put together by the ACI Euribor Association, which has
developed several proposals in terms of creating a common platform
where CP programmes are documented, supervised and standardised. “The
Association is looking to finalise a report for the ECB in December and
go live in early 2004,” says Mr Ford.
While the Step initiative will have ramifications across Europe, the
most significant move would be to bring France – the largest
stand-alone domestic European CP market – closer to the ECP market.
“There is E800bn-E900bn liquidity in France that is not currently fully
accessible to ECP. The French regulator seems to have embraced the Step
proposals and agrees that if paper, regardless of where it comes from,
meets the standardised requirements effectively, the market will be
open to them,” says Mr Ford.
Short sighted
The lack of a short-term market also appears to be well on the way to
being overcome. According to Mr Ford, the ECP market is more of a term
market, compared to the US. It hasn’t captured the pure cash sector –
the overnight market and the overdraft funding that corporates still
undertake – because there haven’t been the operational issuing
mechanics in place, but this has now changed, he says.
Those mechanics were provided by leveraging of Euroclear France’s
infrastructure to the ECP market, which means that the infrastructure
is now available to automate much of the manual processing that was
associated with short-term securities issuance and settlement. In
addition, the European Pre-issuance Messaging (EPIM) system, a central
messaging hub for the overnight market that was created by Euroclear,
Clearstream and DTCC, now automates something as simple as assigning a
code to a new issue. This used to be done by telephone and has now been
totally automated, which has helped to develop the same-day market.
“It used to take between 30 minutes and three hours to get a code and
now, using the EPIM system, we can do so in a matter of seconds. The
industry is therefore working together to resolve these types of
automation and straight-through processing issues, so that they don’t
become a bottleneck preventing the market from taking off,” says
Philippe Laurensy, director and head of fixed income product management
at Euroclear.
Philippe Laurensy: the industry is working together to reduce processing issues
While EPIM’s coverage is still limited, volumes are likely to increase
significantly. EPIM processes 15% of the market, but Euroclear hopes to
have a big jump in volumes between now and the end of 2003 because
there are a number of very active users that are currently testing.
“The objective is to reach at least 50% by the year-end,” says Mr
Laurensy.
The ECP market is expected to resume its upward path, thanks to
increasing demand that will not be restricted to Europe. Most market
participants expect that money market funds will continue to grow over
the medium to long term.
Over the last five years, Europe has seen a big shift from commercial
bank deposits into dynamically managed retail money market funds, which
happened in the US 10 to 15 years ago, and additional growth can be
expected from the retail deposits currently held in Asia, for example –
they are still held in commercial banks, but people are now looking for
alternatives. “Considering the volume of commercial bank deposits and
the likelihood of a major cultural shift towards money market funds,
the ECP market cannot fail to expand. As a result, if the USCP market
totals $1.3 trillion today, I can see the ECP market eventually
reaching $2 trillion.”
