STEP: the emergence of a new market

1
STEP the emergence of a new market

• Marco Laganá
• Taormina, 20 April 2007

2
Agenda
STEP and the main features for smooth
functioning financial markets Safety Accessibi
lity Transparency Prospects Liquidity EU
market growth STEP market growth Conclusion
3
The STEP Governance Structure
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial
ECB/ESCB
STEP features provide additional investors
safeguards
4
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• Accessibility
• - Non discriminatory access
• - Standardisation

STEP features can favour a more open and
accessible market
5
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• Transparency is taken as unimpeded access to
  information on
• 1) the markets rules of procedure and operation,
  
• 2) the financial features of the assets,
• 3) the price formation mechanism, and
• 4) the relevant prices and quantities (quotes,
  interest rates, trading volumes, outstanding
  amounts, etc.).

STEP features enhance market transparency
6
Features for smooth functioning markets
Prospects Conclusion
STEP yield curves and rate times series
Safety-accessibility-transparency-adaptability-spe
cial
Breakdown by issuer group and rating levels are
available
STEP times series
New price discovery tools
Source ECB
7
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• - UCITS directive and STEP
• Eligibility of STEP papers as ECB collateral
• STEP and financial integration

STEP features are institutionally valuable
8
Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth

• Prospects
• Liquidity
• EU market growth
• STEP market growth

9
Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Electronic trading in unsecured markets 1999
2006 e-MID
Liquidity in money markets

Electronic trading in secured markets 2002 2006
Increase in electronic trading
18
Source ECB Euro MMS 2006
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Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Liquidity in money markets
Short-term securities evolution of secondary
market turnover 2000 - 2006
Source ECB Euro MMS 2006, 2002100
In short-term securities, liquidity refers mostly
to primary markets
Increase in MFI primary market activity
22
Source ECB securities database
11
Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Cross-market segment analysis trading structure
2005 - 2006
Source ECB Euro MMS 2006
STEP features are designed to favour a) financial
integration, b) standardisation, and c) a
broadening of the investor base. Similarly to
what has occurred for the secured and unsecured
markets, this should result in higher liquidity,
especially in terms of electronic activity.
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Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Outstanding amounts of US short term securities
(USD bln)
Outstanding amounts of euro-denominated short
term securities (EUR bln, world residents)
MFI-driven growth
Source ECB Euro MMS 2006, Fed, ECB securities
issues database
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Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
US ABCP is 10 times larger than the European ABCP
segment!
The European ABCP is seen as the segment with the
major growth potential
ABCP segment to be monitored
Source ECB Euro MMS 2006
14
Features for smooth functioning markets
Prospects Conclusion
A potential total of EUR 417 bln of programmes is
STEP labelled
Liquidity-EU market growth-STEP market growth
STEP growth 80 euro-denominated
The STEP markets is rapidly growing
Source ECB, STEP secretariat
15
Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Potential and effective growth of the STEP market

Max potential amount than can be issued
Actual outstanding
The STEP market has further potential to grow
Source ECB and STEP Secretariat
16
Features for smooth functioning markets
Prospects Conclusion
Liquidity-EU market growth-STEP market growth
Outstanding euro denominated short term issues
(non-govt sectors, world residents)
Actual STEP outstanding
Comparing the total outstanding with the STEP
potential and effective growth
Max potential STEP amount that can be issued
The STEP market has already a large share of the
STS market
Source ECB and STEP market secretariat
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• 1) STEP features promote safety, accessibility,
  transparency and adaptability for the short term
  securities segment. Positive news for smooth
  functioning
• 2) STEP features are designed to favour a)
  financial integration, b) standardisation, and c)
  a broadening of the investor base. This should
  result in higher liquidity.
• 3) The STEP market faces a rapid growth and shows
  further potential, especially for ABCP

Features for smooth functioning markets
Prospects Conclusion
Conclusion
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Thank you
Features for smooth functioning markets
Prospects Conclusion
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Annexed material
Features for smooth functioning markets
Prospects Conclusion
20
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• Safety
• 1) Organizational requirements and Governance
  structure
• 2) The STEP Legal Documentation
• 3) The labeling cycle (admission to trading)

STEP features provide additional investors
safeguards
21
The STEP legal documentation
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial
The ECB/Eurosystem is involved
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The STEP labelling cycle
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability--sp
ecial
Issuer/arranger

• application form
• information memorandum
• declaration of adherence to Convention

STEP Secretariat

• application form
• information memorandum
• declaration of adherence to Convention
• STEP identifier

Eurosystem
Assessment of compliance with STEP standards
STEP Secretariat
Info memo NOT STEP-compliant
Info memo STEP-compliant
STEP Secretariat
STEP Secretariat

• Declaration of STEP-compliance
• info memo on STEP Market website

Message on causes of non-compliance
Issuer/arranger, relevant NCB, ECB
If all information is provided, the STEP label is
granted in a few days
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Number of active banks per year and per segment
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial
Signs that Banks participation in the STS
market is slowly growing
4
Source ECB survey and Euro Money Market Study
(MMS) 2006 www.ecb.int/pub/pdf/other/euromoneymark
etstudy200702en.pdf
24
Money market concentration
Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial
however the market is currently quite
concentrated
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Source ECB euro money market survey 2006,
Concentration in Q2 2006
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Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• Number of issuers whose programmes received the
  STEP label

the financial features of individual programmes
are available
Market transparency enhanced
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Features for smooth functioning markets
Prospects Conclusion
STEP spreads
Safety-accessibility-transparency-adaptability-spe
cial
Breakdown by issuer group and rating levels is
available
New price setting and discovery tools
Source ECB
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Features for smooth functioning markets
Prospects Conclusion
Safety-accessibility-transparency-adaptability-spe
cial

• Adaptability to structural developments and
  innovation
• The STEP Market Committee
• Shall monitor market developments.
• Shall establish and review the standards on which
  the STEP label is based.
• May amend the provisions of the STEP Market
  Convention
• Shall provide guidance on the appropriate and
  consistent interpretation of the STEP Market
  Conventions provisions.

STEP features are adapted to a predominantly OTC
wholesale market
Source STEP market convention