Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Central Bank Consults on European Mechanism for Issuance and Distribution of Debt Securities
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  • European Central Bank Consults on European Mechanism for Issuance and Distribution of Debt Securities
    05/28/2019
    The European Central Bank, together with those national central banks that have adopted the Euro (collectively known as the Eurosystem), has launched a consultation on proposals for a harmonized European system for issuing and distributing Euro denominated debt securities within the EU. The consultation paper seeks feedback on the state of the existing market, the most appropriate ways to deal with certain issues faced by the market and the measures the Eurosystem has proposed for a potential new system.

    The paper highlights the following key issues in the existing market:
     
    • Lack of a pan-European issuance mechanism: under the current system, issuers wishing to issue debt securities denominated in Euro rely on agent banks to arrange the issuance procedure; this means there is no single issuance system operating in "central bank money" (i.e. banknotes or deposits held at a central bank, which may be used for settlement purposes) that would enable issuers to more efficiently reach all European investors;
    • Issuer preference for domestic markets and/or international securities depositories: investors tend to rely on global or local central securities depositories to hold their securities post-issuance; because the distribution of securities tends to be carried out along national lines, domestic investors and market infrastructure providers may be the preferred choice for issuers; when looking at international investment, issuers would likely rely on international depositories using commercial bank money;
    • Multiplicity of issuance platforms: issuers require input at the pre-issuance stage (which includes preparation of the issuance, price discovery (i.e. syndication, auction or private placement) and pricing of securities); at present the procedures for providing such services are governed by private initiatives that lack standardization and harmonization.

    The paper sets out two options for addressing these challenges: (i) harmonization of the pre-issuance process in areas such as a standardized order book, consistent use of terminology and timelines and processes; and (ii) establishment of a pan-European market infrastructure service enabling euro debt issuers to access the EU market as a whole. The paper goes on to describe in detail a proposed mechanism for the market infrastructure service (referred to as the "European Distribution of Debt Instruments"). The service would function across both pre-issuance and post-trade activities as a centralized service interlinking issuers and central securities depositories, using existing market infrastructures such as TARGET Services. Potential benefits of the EDDI system could include enhanced market-wide interaction between all market participants, the option for issuers to issue "European" securities without the need to specify a location of issuance and a standardized communication channel between issuers, investors and custodians.

    The consultation closes on July 9, 2019. The Eurosystem will consider the feedback it receives when determining potential follow-up actions and the possible establishment of the European mechanism.

    View the Eurosystem consultation paper.

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