Strategy, research and development
STEP: the emergence of a
new market
Marco Laganá
Taormina, 20 April 2007
Marco Laganà
April 2007
- 1-
Strategy, research and development
Agenda
STEP and the main features for smooth functioning financial
markets
Safety
Accessibility
Transparency
Prospects
Liquidity
EU market growth
STEP market growth
Conclusion
…
Marco Laganà
April 2007
- 2-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
The STEP Governance Structure
ACI
Euribor ACI
Agreement or MoU
Euribor EBF
EBF
STEP Market
Convention
STEP Market
Committee
STEP Secretariat
STEP features provide additional investors’ safeguards
Marco Laganà
April 2007
ECB/ESCB
- 3-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
Accessibility:
- Non discriminatory access
- Standardisation
STEP features can favour a more open and accessible market
Marco Laganà
April 2007
- 4-
Strategy, research and development
Features for smooth functioning markets
Prospects
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
Marco Laganà
April 2007
- 5-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
STEP yield curve - total issuance - 4apr07
STEP yield curves
and rate times
series
4.3
4.2
4.1
4
Breakdown by issuer group and rating
levels are available
3.9
3.8
3.7
3.6
0-3 days
4-9
10-40
41-100
101-200
201-366
STEP rates time series- 10-40 days
4
STEP times series
3.95
3.9
3.85
New price discovery tools
Source: ECB
Marco Laganà
3.8
3.75
26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 01-Apr 02-Apr 03-Apr 04-Apr 05-Apr
April 2007
- 6-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
- UCITS directive and STEP
- Eligibility of STEP papers as ECB
collateral
- STEP and financial integration
STEP features are “institutionally” valuable
Marco Laganà
April 2007
- 7-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
Prospects
•
Liquidity
•
EU market growth
•
STEP market growth
Marco Laganà
April 2007
- 8-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
Liquidity in money markets
25000
EUR bln
20000
Electronic trading in
unsecured markets 1999
– 2006: e-MID
15000
10000
5000
0
1999
2000
2001
2002
overnight small deals
2003
2004
2005
2006
overnight large deals
Electronic trading in
secured markets 2002 –
2006
100%
90%
80%
70%
60%
50%
40%
30%
Increase in electronic
trading
20%
10%
0%
2002
2003
Source: ECB Euro MMS 2006
Marco Laganà
Direct
April 2007
2004
Voice broker
2005
Electronic trading
2006
18
- 9-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
Government Issues
Bank Issues
Non-Bank Issues
Liquidity in money markets
200
180
Short-term securities’ evolution
of secondary market
turnover 2000 - 2006
160
140
120
100
80
60
Source: ECB Euro MMS 2006,
2002=100
40
20
0
2000
2001
2002
2003
2004
2005
2006
GROSS ISSUES (primary market)
Euro-denominated short-term debt securities by issuer sector EU bln
800
In short-term securities,
liquidity refers
mostly to primary
markets
Increase in MFI primary
market activity
MFI
700
non financial corporations
600
Non monetary financial corporations
(including ABCP)
500
400
300
200
100
0
Source: ECB securities database
Marco Laganà
Dec-99
Dec-00
April 2007
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
22
- 10-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
Cross-market segment analysis: trading structure 2005 - 2006
Unsecured
Secured
FX swaps
FRA
OIS
IRS
Xccy
swaps
Short-term
securities
2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006
100%
80%
60%
40%
20%
0%
Direct
via Voice Broker
via Electronic Broker
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.
Marco Laganà
April 2007
26
- 11-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
330
Asset-backed (left scale)
Financial (left scale)
Nonfinancial (right scale)
1000
900
290
Outstanding amounts of US
short term securities (USD bln)
250
800
210
700
170
600
130
500
2001
90
2002
2003
2004
600
MFI
500
non financial corporations
400
Non monetary financial corporations
(including ABCP)
2005
2006
Outstanding amounts of eurodenominated short term
securities (EUR bln, world residents)
300
200
MFI-driven growth
100
0
Dec-99
Marco Laganà
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
April 2007
Source: ECB Euro MMS 2006, Fed, ECB securities issues database
- 12-
Strategy, research and development
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!
Outstanding amounts end
October 2006 (EUR billion)
ABCP
CDs
CPs
1600
The European ABCP is seen as
the segment with the major
growth potential
1400
1200
1000
800
600
400
200
0
European domestic
and ECP issuance in
euro
ABCP segment to be monitored
Domestic USCP
issued in USD
Source: ECB Euro MMS 2006
Marco Laganà
April 2007
- 13-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
EUR billions
250
40
outstanding amounts (LHS)
STEP
growth
number of programmes (RHS)
200
32
150
24
100
16
50
8
~ 80% eurodenominated
0
0
Jul.06
Aug.06
Sept.06
Oct.06
Nov.06
Dec.06
Jan.07
Feb.07
Mar.07
A potential total of EUR 417 bln of programmes is STEP labelled…
The STEP markets is rapidly growing
Source: ECB, STEP secretariat
Marco Laganà
April 2007
- 14-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
STEP growth
EUR bln
440
Potential and
effective growth
of the STEP
market
400
Max potential amount
than can be issued
360
320
280
240
Actual outstanding
200
160
120
80
40
0
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
The STEP market has further potential to grow
Source: ECB and STEP Secretariat
Marco Laganà
April 2007
- 15-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Liquidity-EU market growth-STEP market growth
STEP growth
EUR bln
700
600
Comparing the
total
outstanding
with the STEP
potential and
effective
growth
Outstanding euro
denominated short
term issues (non-govt
sectors, world
residents)
Actual STEP
outstanding
500
400
300
200
100
0
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
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
Marco Laganà
April 2007
- 16-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Conclusion
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
Marco Laganà
April 2007
- 17-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Thank you
Marco Laganà
April 2007
- 18-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Annexed material
Marco Laganà
April 2007
- 19-
Strategy, research and development
Features for smooth functioning markets
Prospects
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
Marco Laganà
April 2007
- 20-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
The STEP legal documentation
Euribor ACI
Agreement or MoU
Euribor EBF
STEP Market
Convention
Provision of data for
the production of STEP statistics
Static data
Dynamic data
Agreement
between the ECB,
and Euribor FBE,
Euribor ACI
(STEP Secretariat)
Technical assistance for the
management of the STEP label (for
2 years)
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
The ECB/Eurosystem is involved
Marco Laganà
April 2007
- 21-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability--special
The STEP labelling cycle
Issuer/arranger
STEP Secretariat
Eurosystem
1.
2.
3.
application form
information memorandum
declaration of adherence to Convention
1.
2.
3.
4.
application form
information memorandum
declaration of adherence to Convention
STEP identifier
Assessment of compliance with STEP standards
STEP Secretariat
Info memo NOT STEP-compliant
STEP Secretariat
Info memo STEP-compliant
STEP Secretariat
Message on causes of
non-compliance
Issuer/arranger, relevant NCB,
ECB
1.
2.
Declaration of STEP-compliance
info memo on STEP Market website
If all information is provided, the STEP label is granted in a few days
Marco Laganà
April 2007
- 22-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
Number of “active” banks per year and per segment
2000 /
2001
2001 /
2002
2002 /
2003
2003 /
2004
2004 /
2005
2005 / 2006
UNSECURED
97
114
119
120
120
153
REPO
81
86
90
94
96
97
OIS
90
71
82
88
88
88
FX SWAP
88
86
100
108
108
141
41
65
71
71
59
FRA
IRS
86
85
97
101
101
109
XCCY SWAPS
80
54
56
60
60
62
SHORT TERM
SECURITIES
87
71
79
78
78
85
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
Marco Laganà
April 2007
- 23-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
Money market concentration
FRAs
FX
swaps
Xccy
ShortTerm
Security
issuance
STS
trading
Unsecured
Secured
OIS
Other
IRS
Top 5
banks
21.7%
36.8%
43.4%
51.8%
62.7%
52.6%
51.2%
76.2%
51.9%
Top 10
banks
35.6%
56.6%
67.8%
71.8%
82.9%
66.8%
70.3%
89.7%
73.0%
Top 20
banks
55.1%
77.9%
87.8%
86.5%
93.9%
84.3%
89.4%
95.6%
91.9%
…however the market is currently quite concentrated
Source: ECB euro money market survey 2006, Concentration % in Q2 2006
Marco Laganà
April 2007
24
- 24-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
Number of issuers whose
programmes received
the STEP label
General
Government,
1
Other
financial
intermediarie
s (ABCP), 3
Non financial
corporation,
7
Supranational,
1
Monetary
Financial
Institutions,
23
…the financial features of individual programmes are available
Market transparency enhanced
Marco Laganà
April 2007
- 25-
Strategy, research and development
Features for smooth functioning markets
Prospects
Conclusion
Safety-accessibility-transparency-adaptability-special
STEP yeald spreads vs eonia
STEP spreads
0.006
0.004
0.002
0
26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 01-Apr 02-Apr 03-Apr 04-Apr 05-Apr
-0.002
Breakdown by issuer group and
rating levels is available
-0.004
-0.006
-0.008
New price setting and discovery tools
Source: ECB
Marco Laganà
April 2007
- 26-
Strategy, research and development
Features for smooth functioning markets
Prospects
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
Marco Laganà
April 2007
- 27-