Last month the European Parliament (EP) passed two amendments to the undertakings for collective investment in transferable securities (UCITS) directive, which potentially will allow European investors far greater access to the Euro-CP market. The move by the regulators will increase the liquidity of the market and will pave the way for same-day trading. It means Europe may finally be able to walk out from the shadow cast by the US market, which is six times bigger than the Euro-CP market in terms of outstandings. The laws limit European funds to having just 10% of their portfolios dedicated to unregulated products. Now it is likely that this limit will be removed. The process is far from over however. A meeting with the EP for the first reading of the laws was originally scheduled for June this year, but was postponed. The delay, rumoured to be due to a problem with translation, highlights the nature of some of the obstructions to pan-European legislation. The Commission des Operations de Bourse (COB), the French market authority, says any local implementation of the laws in France may not be seen until the end of 2003. John Ford is ECP product manager at Deutsche Bank, and head of the ECPA. He says: "The French money funds have about euro200 billion ($175.84 billion) available to them for investment, and Italy and Spain about euro60 billion each, so there is a lot of money out there that is currently barred from the Euro-CP market." The EP passed both parts of the directive on October 22, but the regulations still have to be locally implemented. Once this happens Ford thinks the market will start to open up. He says: "The COB believes this will take another two years, which is still too long. Hopefully we may be able to negotiate some concessions in the interim." Peter Eisenhardt, head of Euro-CP at JPMorgan, is also confident of success, but is frustrated too by the time being taken to get results. He says: "European regulators seem to accept the arguments put forth in the memorandum. However, change will only follow the passage of the European-wide UCITS directive. Passage has not been as quick as the market would have liked." The dealing community is keen for the 10% limit to be removed as quickly as possible, as it will mean a corresponding increase in their Euro-CP business. The question is whether issuers and investors will profit as highly. Mikael Pacot is the short-term fund manager at CPR Gestion, a French fund that has over $12 billion of assets in fixed-income portfolios. He says: "I would definitely like to get more involved in Euro-CP, because you get better returns in that market. IBM will give you five or six extra basis points. It would be far more helpful if there were no limit." This is reiterated by Geert Wijnhoven, director, Euro-CP and funding desk at ING Barings/BBL. But he also demonstrates how, in some sectors, good news for the investor invariably means bad news for the issuer. He says: "Most Euro-CP issuers use spreads against Euribor or Libor as their benchmark, whereas the French domestic market follows a spread against the overnight index swap curve. In the last two to three months tier-two Euro-CP issuers have been paying high premiums in the market. So, compared to tier-two French domestic issuers, Euro-CP issuers are paying more value to investors. If the 10% rule had already been abolished French investors could have taken much more advantage of the Euro-CP issuers." The likelihood of investors pouring money into Euro-CP if the limits are removed depends on how much of their money is in the product now. Although many will have filled their 10% limit, this is unlikely to be purely Euro-CP. Ford, at Deutsche Bank, says: "I think most funds probably have filled their 10% quota, but it won't just be with Euro-CP. Other instruments will have been used, so it is really a case of each fund deciding if it wants to make an extra commitment to the ECP market." And the matter is complicated further by the fact that it can be difficult to determine which products actually belong in the non-regulated bracket. Many funds may hold back on investing all they can in the market to be sure they comply with the law. Pacot, at CPR Gestion, says: "It can be very difficult to calculate which products are actually unregulated. For example, some Euro-CP from the Netherlands is listed, and therefore would not be included in the 10%." Isabelle Reux-Brown is head of short-term product management at CDC Asset Management. With around $150 billion in fixed income portfolios it is one of the biggest asset managers in Europe. She is also unsure on how a law change would affect its strategy. She says: "It is hard to say how we will move if new laws come in, because different clients have different needs for the variety of products available. In general it will allow bigger funds into the Euro-CP market and more liquidity will result, so everyone will benefit." But French issuers only involved in their domestic market probably will not benefit as much. If French funds take as much advantage of the law changes for cross-border investment as dealers hope they will, it could spell disaster for those domestic issuers who rely solely on French investors. And the French funds are keen to move things along. Eisenhardt, at JPMorgan, says: "Limits on Euro-CP investment restrict opportunities for fund managers - potentially harming their performance - so they are keen to see them abolished. ASFFI (the association of French fund managers) made this clear by preparing a joint memorandum with the ECPA for the COB, demonstrating that the market is sufficiently transparent, liquid, and supervised to operate without the current 10% limit." Vincent Garllard, head of funding at Reseau Ferre de France, says: "I am not worried. We have domestic instruments, a US programme and a Euro-CP facility, so our investor base is wide enough to cover most eventualities. For issuers with only domestic programmes however, a change in the law could bring implications for the future." But he adds that these developments are a long way off. A trader at SG also thinks that patience is needed when dealing with the market. He says: "The number of coordinated funds in the market is not great, and this is what the directive seeks to improve. But the lighter constraints that have been passed are coupled with tighter constraints elsewhere, so I don't think fund managers will be rushing to comply." And the fact that each member of the European Union has been left to interpret the new laws freely, assessing the liquidity, quality and risk of the Euro-CP market on their own criteria, means co-ordination between member states has been side-stepped. Anders Ganten, economic and monetary affairs committee secretariat at the EP, says: "It is hard to give a very precise answer on how the new text will affect Euro-CP, as there are many different kinds and some of them fall within the definition of money market instruments. Ultimately, however, this issue will most likely be settled on a case-by-case basis by the national supervisory body." Most dealers see the directive as a platform to boost the issue of same-day settlement. Wijnhoven, at ING Barings/BBL, says: "All in all I'm very much in favour of the proposed changes because they will make the market more transparent and will hopefully lead to one single European clearing platform. This will speed up the usage of same-day settlement by both investors and issuers, which is ultimately what we are all after. But I am afraid that implementing the changes will take a lot longer than we all hope." But some comfort can be drawn from the words of Paula Fernandez Hervaz, press officer at the EP. She is upbeat about the future of the laws and she says: "There was good agreement on the motions that were put forward. The only one where there was still some argument was where the member states would be allowed a period of five years to implement the changes. If this is overcome though, the new text could be adopted within months."
November 23, 2001
