step: the emergence of a new market

Marco Laganà April 2007

Strategy, research and development

- 1-

STEP: the emergence of a new market

Marco Laganá

Taormina, 20 April 2007



- 2-

STEP and the main features for smooth functioning financial markets

SafetyAccessibilityTransparency

ProspectsLiquidity EU market growthSTEP market growth

Conclusion …

Agenda



- 3-

The STEP Governance Structure

ECB/ESCB

Euribor ACIACI Agreement or MoU

STEP Secretariat

STEP Market Committee

STEP Market Convention

Euribor EBF EBF

Safety-accessibility-transparency-adaptability-special

Features for smooth functioning markets Prospects Conclusion

STEP features provide additional investors’ safeguards



- 4-

Accessibility:

- Non discriminatory access

- Standardisation


STEP features can favour a more open and accessible market




- 5-

Transparency is taken as unimpeded access to information on:

1) the market’s 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-



STEP yield curve - total issuance - 4apr07

3.6

3.7

3.8

3.9

4

4.1

4.2

4.3

0-3 days 4-9 10-40 41-100 101-200 201-366

STEP yield curves and rate times

series

STEP rates time series- 10-40 days

3.75

3.8

3.85

3.9

3.95

4

26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 01-Apr 02-Apr 03-Apr 04-Apr 05-Apr

Breakdown by issuer group and rating levels are available

Source: ECB

STEP times series

New price discovery tools



- 7-

- UCITS directive and STEP

- Eligibility of STEP papers as ECB collateral

- STEP and financial integration


STEP features are “institutionally” valuable




- 8-

Prospects

• Liquidity

• EU market growth

• STEP market growth

Features for smooth functioning markets Prospects ConclusionLiquidity-EU market growth-STEP market growth



- 9-

18

Electronic trading in unsecured

markets 1999 – 2006: e-MID

Liquidity-EU market growth-STEP market growth


Liquidity in money markets

Electronic trading in secured markets

2002 – 2006

Source: ECB Euro MMS 2006

Increase in electronic trading

0

5000

10000

15000

20000

25000

1999 2000 2001 2002 2003 2004 2005 2006

EU

R b

ln

overnight sm all deals overnight large deals

0%10%20%30%40%50%60%70%80%90%

100%

2002 2003 2004 2005 2006

Direct Voice broker Electronic trading



- 10-

Short-term securities’ evolution of secondary market turnover 2000 -

2006

22

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006

Government Issues Bank Issues Non-Bank Issues

Liquidity in money markets

In short-term securities,

liquidity refers mostly to

primary markets

Source: ECB Euro MMS 2006, 2002=100


Source: ECB securities database

Increase in MFI primary market activity


GROSS ISSUES (primary market)Euro-denominated short-term debt securities by issuer sector EU bln

0

100

200

300

400

500

600

700

800

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06

MFI

non financial corporations

Non monetary financial corporations(including ABCP)



- 11-

Cross-market segment analysis: trading structure 2005 - 2006

26

0%

20%

40%

60%

80%

100%2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006

Unsecured Secured FX swaps FRA OIS IRSXccy

swapsShort-termsecurities

Direct via Voice Broker via Electronic Broker


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.





- 12-


Outstanding amounts of US short term securities (USD bln)

Source: ECB Euro MMS 2006, Fed, ECB securities issues database

Outstanding amounts of euro-denominated short term securities (EUR bln, world residents)

MFI-driven growth


0

100

200

300

400

500

600

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06

MFI

non financial corporations

Non monetary financial corporations(including ABCP)

500

600

700

800

900

1000

2001 2002 2003 2004 2005 200690

130

170

210

250

290

330Asset-backed (left scale)Financial (left scale)Nonfinancial (right scale)



- 13-


The European ABCP is seen as the segment with the major growth potential

US ABCP is 10 times larger than the European ABCP segment!


ABCP segment to be monitored


Outstanding amounts end October 2006 (EUR billion)

0

200

400

600

800

1000

1200

1400

1600

European domesticand ECP issuance in

euro

Domestic USCPissued in USD

ABCP CDs CPs



- 14-


Source: ECB, STEP secretariat

STEP growth~ 80% euro-denominated

The STEP markets is rapidly growing

A potential total of EUR 417 bln of programmes is STEP labelled…


0

50

100

150

200

250

Jul.06 Aug.06 Sept.06 Oct.06 Nov.06 Dec.06 Jan.07 Feb.07 Mar.07

EUR billions

0

8

16

24

32

40

outstanding amounts (LHS) number of programmes (RHS)



- 15-


Source: ECB and STEP Secretariat

Potential and effective

growth of the STEP market

The STEP market has further potential to grow

STEP growth EUR bln

0

40

80

120

160

200

240

280

320

360

400

440

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

Max potential amount than can

be issuedActual

outstanding




- 16-


Source: ECB and STEP market secretariat

Comparing the total

outstanding with the

STEP potential

and effective growth

The STEP market has already a large share of the STS market

STEP growth EUR bln

0

100

200

300

400

500

600

700

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

Actual STEP outstanding

Max potential STEP amount that

can be issued

Outstanding euro denominated

short term issues (non-govt sectors, world residents)




- 17-


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

Conclusion



- 18-


Thank you



- 19-


Annexed material



- 20-

Safety

- 1) Organizational requirements and

Governance structure

- 2) The STEP Legal Documentation

- 3) The labeling cycle (admission to trading)

Features for smooth functioning markets Prospects ConclusionSafety-accessibility-transparency-adaptability-special

STEP features provide additional investors’ safeguards



- 21-

Euribor ACI Euribor EBF

Provision of data forthe production of STEP statistics

Technical assistance for the management of the STEP

label (for 2 years) Agreement

between the ECB, and

Euribor FBE, Euribor ACI

(STEP Secretariat)

Standard Agreement

between the ECB and

Eligible Data Providers

Annex: ECB Reporting Instructions

Agreement between

9 NCBs, ECB and Euribor FBE, Euribor ACI

(STEP Secretariat)

Annex: Manual of Procedures on labelling

Agreement or MoU

Static data Dynamic data

STEP Market

Convention

The STEP legal documentationSafety-accessibility-transparency-adaptability-special


The ECB/Eurosystem is involved



- 22-

Assessment of compliance with STEP standards

1. Declaration of STEP-compliance 2. info memo on STEP Market

website

Message on causes of non-compliance

Info memo NOT STEP-compliant

1. application form 2. information memorandum3. declaration of adherence to

Convention

Issuer/arranger, relevant NCB, ECB

Info memo STEP-compliant

1. application form2. information memorandum3. declaration of adherence to Convention4. STEP identifier

Issuer/arranger

STEP Secretariat

EurosystemSTEP Secretariat

STEP SecretariatSTEP Secretariat

The STEP labelling cycleSafety-accessibility-transparency-adaptability--special


If all information is provided, the STEP label is granted in a few days



- 23-

2000 / 2001

2001 / 2002

2002 / 2003

2003 / 2004

2004 / 2005

2005 / 2006

UNSECURED 97 114 119 120 120 153REPO 81 86 90 94 96 97OIS 90 71 82 88 88 88FX SWAP 88 86 100 108 108 141

FRA 41 65 71 71 59IRS 86 85 97 101 101 109XCCY SWAPS 80 54 56 60 60 62SHORT TERM SECURITIES 87 71 79 78 78 85

4Source: ECB survey and Euro Money Market Study (MMS) 2006 www.ecb.int/pub/pdf/other/euromoneymarketstudy200702en.pdf

Number of “active” banks per year and per segment



Signs that Banks’ participation in the STS‘ market is slowly growing…



- 24-

24

Unsecure

dSecure

d OISOther IRS FRAs

FX swaps Xccy

ShortTermSecurit

y issuance

STS trading

Top 5 banks 21.7% 36.8% 43.4% 51.8% 62.7% 52.6% 51.2% 76.2% 51.9%

Top 10

banks 35.6% 56.6% 67.8% 71.8% 82.9% 66.8% 70.3% 89.7% 73.0%

Top 20

banks 55.1% 77.9% 87.8% 86.5% 93.9% 84.3% 89.4% 95.6% 91.9%



Money market concentration

Source: ECB euro money market survey 2006, Concentration % in Q2 2006

…however the market is currently quite concentrated



- 25-

Number of issuers whose programmes received the STEP label


Market transparency enhanced


…the financial features of individual programmes are available

Monetary Financial

Institutions, 23

Non financial corporation,

7

General Government,

1Supranational,

1Other financial

intermediaries (ABCP), 3



- 26-



STEP spreadsSTEP yeald spreads vs eonia

-0.008

-0.006

-0.004

-0.002

0

0.002

0.004

0.006

26-Mar 27-Mar 28-Mar 29-Mar 30-Mar 31-Mar 01-Apr 02-Apr 03-Apr 04-Apr 05-Apr

Breakdown by issuer group and rating levels is

available

Source: ECB

New price setting and discovery tools



- 27-

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 Convention’s provisions.


STEP features are adapted to a predominantly OTC wholesale market


Source: STEP market convention

step: the emergence of a new market

Documents