In part 1 of this instalment, we looked at how Euroclear Bank has been meeting its clients’ collateral demands and settlement challenges as well as managing its own treasury position.
Managing through a time of uncertainty - Part 2
In part 2, we will look at how Euroclear Bank has been responding to the market needs - specifically, the financing activities of corporates and governments through primary market issuance. Valérie will also share with us her view on the current market liquidity and resilience with comparison to the 2008-2009 financial crisis.
Question: Recently there have been large volumes of primary market issuance, and many believe this is going to carry on as refinancing gathers pace. Have any stresses started to appear in the new issuance processes?
Valérie: We have seen a big surge in new issuance activity from both corporate issuers as well as government issuers, not just recently but since September last year. In response to the pandemic and the oil crisis, a number of financing schemes have come into play on top of the existing ones.
For instance, new facilities have been set up by the Bank of England and the European Central Bank to support European corporates. As a result, there has been a significant increase in new Euro Commercial Paper (ECP) programmes being launched.
We have also witnessed the increased issuance of Medium Term Notes (MTNs). MTNs are based on an established programme which facilitates multiple future issuance while bonds are based on an one-off ‘stand-alone’ issuance. With the MTN programme established and the documentation already in place, MTNs offer relatively quicker time to market, less exposure to volatility and without the need for investor roadshows. With these qualities prised by issuers especially during the pandemic, MTNs have quickly become an issuer substitute funding instrument for bonds.
To manage the substantial volumes, while teams working remotely, we have undertaken several initiatives with the market to add flexibility and efficiency to the process.
For instance, we have been working closely with various capital markets law firms to streamline the legal documentation that allows quicker acceptance of Euro Commercial Paper (ECP) in Euroclear Bank so that issuers can quickly access much needed short-term funding.
With our providers adjusting their day-to-day processes to meet the social distancing and quarantine challenges, we have also begun adapting the new issue closing process to allow the use of electronic signatures on new issue documentation, and digital storage of the global notes and final instrument terms during the interim period.
Valérie: That is a good question. While right now I can’t answer it definitively, I can tell you that it is something we are working towards. We have started to organise working groups to see how we can make those arrangements sustainable in the long run. We strongly believe that going more digital benefits the market both from a cost and from a risk perspective.
Q: In your view, how have the global financial markets performed in 2020, especially compared to the financial crisis in 2008-2009 on issues around liquidity and resilience?
Valérie: I think the markets have actually performed well, especially compared to 2008. The timing and the magnitude of the intervention by central banks globally have been critical to the stabilisation of markets. If we compare this to 2008, financial markets are much more resilient now, in part thanks to the robust financial market infrastructures that exist to support it, but certainly also due to the regulations that have been implemented since then.
On the point of liquidity, Euroclear has made significant technological advances since 2008 enabling us to be in an even better position to support the market. These developments allow a greater range of securities to be financed in triparty, and they give our clients the ability to efficiently mobilise assets held in a number of domestic markets, including most of the T2S markets and the US.
What will be important to watch now is how the real economy and employment levels evolve. This may transform into another type of crisis as the effects of lockdowns flow through the real economy – the impacts remain to be seen.
Given our role as a FMI, we will continue to be extremely vigilant. Our Credit department keeps a constant eye on the evolving market situation across the globe, so that we can regularly assess the impact of changes on our clients and consequently our own credit exposure.
