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STEP: the emergence of a new market

STEP: the emergence of a new market. Marco Laganá Taormina, 20 April 2007. Agenda. STEP and the main features for smooth functioning financial markets Safety Accessibility Transparency Prospects Liquidity EU market growth STEP market growth Conclusion ….

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STEP: the emergence of a new market

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  1. STEP: the emergence of a new market Marco Laganá Taormina, 20 April 2007

  2. Agenda • STEP and the main features for smooth functioning financial markets • Safety • Accessibility • Transparency • Prospects • Liquidity • EU market growth • STEP market growth • Conclusion • …

  3. The STEP Governance Structure Euribor ACI Euribor EBF EBF ACI Agreement or MoU STEP Market Convention STEP Market Committee STEP Secretariat Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special ECB/ESCB STEP features provide additional investors’ safeguards

  4. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Accessibility: - Non discriminatory access - Standardisation STEP features can favour a more open and accessible market

  5. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Transparency is taken as unimpeded access to information on: 1) the market’s rules of procedure and operation, 2) the financial features of the assets, 3) the price formation mechanism, and 4) the relevant prices and quantities (quotes, interest rates, trading volumes, outstanding amounts, etc.). STEP features enhance market transparency

  6. Features for smooth functioning marketsProspects Conclusion STEP yield curves and rate times series Safety-accessibility-transparency-adaptability-special Breakdown by issuer group and rating levels are available STEP times series New price discovery tools Source: ECB

  7. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special - UCITS directive and STEP • Eligibility of STEP papers as ECBcollateral • STEP and financialintegration STEP features are “institutionally” valuable

  8. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth Prospects • Liquidity • EU market growth • STEP market growth

  9. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth Electronic trading in unsecured markets 1999 – 2006: e-MID Liquidity in money markets Electronic trading in secured markets 2002 – 2006 Increase in electronic trading 18 Source: ECB Euro MMS 2006

  10. Features for smooth functioning marketsProspects Conclusion Liquidity-EU market growth-STEP market growth Liquidity in money markets Short-term securities’ evolution of secondary market turnover 2000 - 2006 Source: ECB Euro MMS 2006, 2002=100 In short-term securities, liquidity refers mostly to primary markets Increase in MFI primary market activity 22 Source: ECB securities database

  11. Features for smooth functioning marketsProspects Conclusion Liquidity-EU market growth-STEP market growth Cross-market segment analysis: trading structure 2005 - 2006 Source: ECB Euro MMS 2006 STEP features are designed to favour a) financial integration,b) standardisation, and c) a broadening of the investor base. Similarly to what has occurred for the secured and unsecured markets,this should result in higher liquidity, especially in terms of electronic activity. 26

  12. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth Outstanding amounts of US short term securities (USD bln) Outstanding amounts of euro-denominated short term securities (EUR bln, world residents) MFI-driven growth Source: ECB Euro MMS 2006, Fed, ECB securities issues database

  13. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth US ABCP is 10 times larger than the European ABCP segment! The European ABCP is seen as the segment with the major growth potential ABCP segment to be monitored Source: ECB Euro MMS 2006

  14. Features for smooth functioning markets Prospects Conclusion A potential total of EUR 417 bln of programmes is STEP labelled… Liquidity-EU market growth-STEP market growth STEP growth ~ 80% euro-denominated The STEP markets is rapidly growing Source: ECB, STEP secretariat

  15. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth Potential and effective growth of the STEP market Max potential amount than can be issued Actual outstanding The STEP market has further potential to grow Source: ECB and STEP Secretariat

  16. Features for smooth functioning markets Prospects Conclusion Liquidity-EU market growth-STEP market growth Outstanding euro denominated short term issues (non-govt sectors, world residents) Actual STEP outstanding Comparing the total outstanding with the STEP potential and effective growth Max potential STEP amount that can be issued The STEP market has already a large share of the STS market Source: ECB and STEP market secretariat

  17. 1) STEP features promote safety, accessibility, transparency and adaptability for the short term securities’ segment.Positive news for smooth functioning • 2) STEP features are designed to favour a) financial integration,b) standardisation, and c) a broadening of the investor base. This should result in higher liquidity. • 3) The STEP market faces a rapid growth and shows further potential, especially for ABCP Features for smooth functioning marketsProspects Conclusion Conclusion

  18. Thank you Features for smooth functioning marketsProspects Conclusion

  19. Annexed material Features for smooth functioning marketsProspects Conclusion

  20. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Safety • 1) Organizational requirements and Governance structure • 2) The STEP Legal Documentation • 3) The labeling cycle (admission to trading) STEP features provide additional investors’ safeguards

  21. The STEP legal documentation Euribor EBF Euribor ACI Agreement or MoU STEP Market Convention Provision of data for the production of STEP statistics Technical assistance for the management of the STEP label (for 2 years) Static data Dynamic data Agreement between the ECB, and Euribor FBE, Euribor ACI (STEP Secretariat) Standard Agreement between the ECB and Eligible Data Providers Agreement between 9 NCBs, ECB and Euribor FBE, Euribor ACI (STEP Secretariat) Annex: ECB Reporting Instructions Annex: Manual of Procedures on labelling Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special The ECB/Eurosystem is involved

  22. The STEP labelling cycle Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability--special Issuer/arranger • application form • information memorandum • declaration of adherence to Convention STEP Secretariat • application form • information memorandum • declaration of adherence to Convention • STEP identifier Eurosystem Assessment of compliance with STEP standards STEP Secretariat Info memo NOT STEP-compliant Info memo STEP-compliant STEP Secretariat STEP Secretariat • Declaration of STEP-compliance • info memo on STEP Market website Message on causes of non-compliance Issuer/arranger, relevant NCB, ECB If all information is provided, the STEP label is granted in a few days

  23. Number of “active” banks per year and per segment Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Signs that Banks’ participation in the STS‘ market is slowly growing… 4 Source: ECB survey and Euro Money Market Study (MMS) 2006 www.ecb.int/pub/pdf/other/euromoneymarketstudy200702en.pdf

  24. Money market concentration Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special …however the market is currently quite concentrated 24 Source: ECB euro money market survey 2006,Concentration % in Q2 2006

  25. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Number of issuers whose programmes received the STEP label …the financial features of individual programmes are available Market transparency enhanced

  26. Features for smooth functioning marketsProspects Conclusion STEP spreads Safety-accessibility-transparency-adaptability-special Breakdown by issuer group and rating levels is available New price setting and discovery tools Source: ECB

  27. Features for smooth functioning marketsProspects Conclusion Safety-accessibility-transparency-adaptability-special Adaptability to structural developments and innovation The STEP Market Committee: • Shall monitor market developments. • Shall establish and review the standards on which the STEP label is based. • May amend the provisions of the STEP Market Convention… • Shall provide guidance on the appropriate and consistent interpretation of the STEP Market Convention’s provisions. STEP features are adapted to a predominantly OTC wholesale market Source: STEP market convention

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