As of September 6, the International Securities Market Association (Isma) records Euro-CP trades through its electronic system, Trax (see MTNWeek, issue 147). This is a breakthrough for dealers battling to get European authorities to view the market as regulated. But change isn't happening fast enough. Valuable investors are locked out of the market and many funding sources are still out of reach. Regulators such as the French Commission des Operations de Bourse (Cob), restrict the amount of unregulated securities investors can hold. And as yet Euro-CP is unregulated. But Trax could change this. There are an estimated $50 billion in outstandings in the French domestic market (see MTNWeek, issue 101). If more French fund managers had unlimited access to Euro-CP, dealers predict the market could triple in size. Giles Chapman, head of Euro-CP sales and marketing at Citibank, says: "French regulators are hanging on to the rule that allows only 10% of a French investor's portfolio to be in Euro-CP. They want to protect their domestic CP market, which is large and liquid, and their domestic banks." The Euro-CP Association (ECPA) which includes 24 of the major Euro-CP dealers, has been struggling for years to break down certain interpretations of the EU directive, Undertakings for Collective Investment in Transferable Securities (Ucits), particularly in France. There is an updated draft of Ucits ready, but regulators are stalling. John Ford is chairman of the ECPA, and director, money market sales at Deutsche Bank. He believes using Trax is a major step forward. He says: "Problems still exist with the regulatory restrictions Europe-wide. We hope that reporting trades through Trax can be used as a negotiating tool and will speed up the deregulation process. The ECPA being part of Isma also helps the argument and gives it lobbying clout." Whether all dealers will report trades to Trax remains to be seen. There is a fee for the service and extra work is involved for traders. Some banks don't even have the system installed. But if trades don't all go through the system it will reduce the ECPA's bargaining power with regulators. Louise Mason, associate director, Euro-CP origination at Barclays Capital (Barclays), points out: "All members of Isma are obliged to report Euro-CP trades to Trax, so that includes all the main participants in the market." Mason, at Barclays, believes more progress can be made. She says: "Trax reporting won't have any immediate effect on the market, but it is a first step. While it's slow-going we would expect logic to prevail in the end against what is an anti-competitive stance on the part of some regulators." Trax has been recording fixed income and equity trades since 1989. As well as regulating markets and reducing risk, it can offer information. Chapman, at Citibank, says: "The system will provide transparency for the market and information about liquidity. It will offer precise figures about market activity which were unavailable before." And Tim Dickenson, head of corporate communications at Isma, says: "Trax minimizes operational risk in transactions by electronically matching both sides to a trade and sorting out any discrepancies between counterparties' understanding of that trade before it proceeds to settlement." Issuers have been pleased by Isma's announcement. Dieter Glueder, head of treasury, Kreditanstalt fur Weideraufbau (KfW), says: "This will help a lot of issuers and investors. In some senses there is a grey area surrounding the national regulations in different European countries. That fragmentation of the Euro-CP market should disappear." KfW's euro5 billion ($5.19 billion) Euro-CP programme is listed in Frankfurt so the issuer can trade listed paper, which is considered regulated by the Cob, as well as unlisted notes. But Glueder, at KfW, hopes that French regulators will alter legislation before real-time settlement occurs. He says: "It's a bit more work to list paper but it is easily done. This will only be a problem when real-time settlement is introduced as listing takes two days." The ECPA is pushing for real-time settlement but more problems lie ahead. Mason, at Barclays, says: "Euroclear now has real time settlement capability, as has Cedel, but until there is a link between the two, we won't have same-day settlement in the market. Both are striving to be the leading European clearing system but real-time Euro-CP settlement cannot work for either without cooperation." Ford, at Deutsche Bank, echoes this frustration. He says: "There is pressure from issuers and investors for same-day settlement. The market is evolving but not fast enough. It is difficult to make radical changes quickly in the settlement process." Trax could change attitudes towards Euro-CP, but dealers know market expansion won't be significant until all investors are free to buy paper. More banks are returning to the market and some dealers will have problems if the scope for business is restricted. Mason, at Barclays, says: "The question is whether the banks coming into the Euro-CP market are offering anything new. I have yet to be convinced. The market is set to grow. We predict $500 billion over the next two to three years. But the hindrance is the regulations and major growth is not going to happen until this is sorted out."
August 11, 2000
