European Central Bank president Mario Draghi on Tuesday may have set the course for primary bond markets in the near term but his organisation is at the heart of a project that could reshape them forever. The ECB spoke exclusively this week to Burhan Khadbai about the European Distribution of Debt Instruments (EDDI) project and what it means for the future of capital markets.
EDDI, a project being run jointly with the European Stability Mechanism (ESM), is billed as a revolution for primary bond markets — a one-stop, synchronised platform for selling euro bonds that handles everything from book building to settlement right across the eurozone.
“Such a connection between pre-issuance and post-trade does not exist today,” said Mehdi Manaa, deputy director general of Market Infrastructures and Payments at the ECB. “There is no single platform for the issuance and distribution of debt instruments in Europe.”
As it stands, there is no great detail of how EDDI will function or who will use it, although the smart money is on the frequent borrowers of the SSA market leading the charge. The ECB is running a market consultation, with responses due by July 9.
One of its key features will be handling work done now by banks during deal execution, raising questions about bookrunners being cut out of the primary market, known as disintermediation. This pre-issuance component of EDDI would include bookbuilding and handling allocations to investors. How that will differ from current platforms such as Ipreo remains unclear but Manaa insisted that banks will still be central to debt syndication.
“EDDI will not introduce any disintermediation,” he said. “We expect investment banks to continue to play the same role. The aim of EDDI is to offer a new concept for debt market participants to operate in. It’s more about adaptation rather than disintermediation.
He is undaunted by those fearful of being left out. “People are speaking about EDDI in an increasingly positive way. With an initiative like EDDI, we cannot exclude some resistance, as there is always a degree of resistance to change, even if the change is positive.”
Manaa added that the ECB was yet to receive any formal feedback from its consultation but it expected most responses in the final week, as was usually the case with such exercises.
“If we receive a positive response, we will have to go back to the [ECB’s] Governing Council and tell them that what we are putting forward is a possible solution to problems facing the euro debt market,” said Manaa. “Any initiative that is put forward to the Governing Council has to be fully in line with the ECB’s mandate and regulatory framework.”
The ECB's Governing Council is expected to make a decision next year on whether to approve the project.
Michael Huertas, co-head of law firm Dentons’ financial institutions regulatory practice group in Europe, is confident that EDDI fits the ECB’s mandate.
“The ECB does have a mandate to promote financial integration of markets generally as well as to support the efficiency of markets and underlying infrastructure,” he said. “The ECB has proven that it is capable of doing that with infrastructure solutions… as well as other institutional solutions, or support of legislative and non-legislative standards.”
Huertas added that EDDI’s appeal to market participants will hinge on what it costs them but that a “pan-jurisdictional and open architecture rulebook” was a “step in the right direction for [the] delivery of… more integrated financial markets irrespective of the EU’s Capital Markets Union project.”
EDDI, it is hoped, will also spruce up bond settlement in Europe — a long-held ECB ambition. “The potential for the use of automation and innovation with EDDI is huge,” said Manaa. “It will be a game changer.”
It won’t all be shiny new systems though. Once allocations are decided, participating central securities depositories (CSDs) would distribute the bonds simultaneously using the ECB’s TARGET-2Securities settlement infrastructure.
“The European debt market operates as a puzzle of [great] complexity,” said Manaa. “Issuers are forced into being restricted with their debt issue[d] to one location, which limits their access to investors.
“Unlike other currency areas, there is no single mechanism that allows issuers to place a debt instrument directly into the eurozone as a single capital market. EDDI will remove that constraint by having all CSDs accessible at the same time for any given issuance. The aim for EDDI is to allow issuers to collect funds in euros in an entirely straightforward way [with]in the EU.”
Although that will be an improvement for Europe, as the ESM’s secretary general Kalin Anev Janse points out, it is already a feature of the US market.
“If you look at how the dollar bond market works, the majority of bonds are settled through Fedwire, the real-time system operated by the US Federal Reserve,” he said. “The euro bond market does not have a primary settlement platform.”
The ESM had been looking for a way to harmonise the pre-issuance aspects of bond sales when it found common ground with ECB, which longed for a unified settlement scheme for the single currency area. Thus EDDI was born — or at least conceived. It is intended though that issuers will be able to use the pre- and post-issuance parts of the system separately if they wish, or indeed, not at all.
Janse insists, however, that there is an appetite for change in the way bond are issued in Europe. “We could either continue to use a system that is not perfect,” he said, “or build one that provides a neutral debt distribution service with modern and pan-European reach that would drive harmonisation.”