09 July 2019

ICMA responds to the ECB's market consultation on European Distribution of Debt Instruments

ICMA responded to the ECB's market consultation on a potential Eurosystem initiative regarding a European mechanism for the issuance and initial distribution of debt securities in the European Union (EDDI).

ICMA has identified the following issues that should be addressed for the successful implementation of EDDI:

1 Governance framework: The involvement of market users in the detailed design – through a user requirements document – and future governance of the project will be critically important to the success of EDDI, if a decision is taken to go ahead.

2 Cost and liability: As users will pay for EDDI through cost recovery, market involvement will help to keep costs acceptable for users and under control. Users will also want to understand the allocation of liability between the ECB/Eurosystem and private sector actors.

3 Optionality: It will be important to ensure that use of EDDI is open, optional, and neither mandatory nor a monopoly. Users of EDDI can then determine whether there are incentives and commercial or other advantages to use it, rather than being required to use it whether it provides value for money or not. Incentives to use EDDI need to be sufficiently clear for the activity to flow naturally through, and consolidate on, the platform.

4 Data: the use, privacy, and regulation aspects of, and rights to the data generated by EDDI will need to be clearly understood and acceptable to users. There are market concerns about the ECB having access in particular to confidential data regarding investors and their relevant trading activity.

5 Neutrality: It will be important either to demonstrate to the market that EDDI is neutral, as intended, as well as on the overall expected net benefits. This is because there will be concerns in the market that EDDI will not be neutral in the medium term, for example in relation to the competitive landscape for intermediation and syndication fees.

6 Capital market integration: EDDI could play a significant role in promoting Capital Market Union and the international use of the euro. But there are significant constraints within which EDDI as a pan-European project will need to work: national legal systems including differing insolvency regimes; national tax systems; and different national government auction mechanisms. Even so, there are still potential opportunities relating to greater transparency and standardisation of euro area sovereign bond terms and conditions.

7 Auction vs. syndicated issuance: Some market participants believe that there is more scope for harmonisation and rationalisation in the auction process whereby different processes and systems are used by various issuing entities or issuers and that market participants would benefit from harmonised processes and a system for EU sovereign and SSA auctions. The US auction platform run by the FRBNY is seen as a success in this regard, for example.

8 Non-euro issuance: EDDI is designed as a pan-European issuance platform for euro area issuers accessing the euro capital markets, as currently there are only national or international platforms. But many issuers in euro also issue in US dollars and other currencies. This means that they will continue to need to use more than one platform, which will involve using different models. Over time the platform should develop multi-currency functionality allowing it to become a one stop shop for frequent borrowers.

9 Systemic risks: It will need to be clear to the market how EDDI will provide a buffer against systemic shocks. Does this amount to the use of central bank money and trust in the ECB rather than private sector alternatives?

10 Perceived conflicts of interest: The ECB is globally the largest holder of euro area bonds as well as a major investor in sovereign, supranational, agency, covered corporate and asset backed securities. If it also provides a platform for such issuers, this information advantage could constitute a significant conflict of interest. How should this be addressed? It will also be important for the ECB to explain to the market why EDDI is within the ECB’s mandate.

11 Pre-issuance: Market participants, including some public sector issuers, will need to be convinced that the pre-issuance role of EDDI is not a solution looking for a problem and many believe that the current market works well for them with low execution risks. What is the evidence that issuers are paying too much and that investors consider that conventional pre-issuance processes, which are often iterative, complex and difficult to replicate substantially through available technology, are sub-optimal? More empirical evidence would be useful to help convince the market.

12 A project in two stages? We are finding that there is more of a consensus in favour of the post-trade potential of EDDI, on grounds of rationalisation of the existing fragmented structure and attendant cost efficiency, than on the pre-issuance platform, at least at this point in time. Market participants also will need to be convinced why the two parts of the EDDI initiative (which are stated to be both voluntary and modular) must be implemented together rather than in two stages, with the post-trade platform being introduced first, and the pre-issuance platform being implemented later.

Full ICMA response

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