As the European commercial paper market obtains a better picture of developing regulatory changes, the mood is relatively positive, since the Basle guidelines and other developments seem to emphasize the harmonization of the European markets. At a London conference last week hosted by Moody's Investors Service and IPMA - the Euro Commercial Paper Committee's Asset-Backed Commercial Paper Conference - yet another such regulatory initiative was unveiled.

A spokesman for the European Central Bank (ECB) detailed a "work in progress" initiative to integrate the fragmented European commercial paper (ECP) markets. The key objective is to provide the market with greater information by promoting additional disclosure standards throughout Europe, with the directive referred to as "STEP." The initiative will be accommodated for an English template and is intended to complement the existing local legislation.

"There is no legislation involved in the process," explained the spokesman. "The idea is to promote convergence among the existing markets with their current legislation and certain conditions that would be added for achieving the standard within STEP."

This initiative is prompted by the numerous complaints concerning market practices and the general lack of a homogenous set of statistics published on a European-wide platform. This, the spokesman said, contributes to the fragmented markets, adding that the creation of harmony among European players would, no doubt, contribute to greater liquidity for this paper.

The conference featured a series of live interactive poll questions put to the 500-plus audience members, which were answered throughout the day's presentations. Audience members were asked whether they believed that STEP might have a positive influence on the market. A majority of the participants answered that they knew very little about it at this point. But one conference attendee said, "STEP will make a difference - and it means a lot more work in terms of structuring because the information will have to be updated on a more regular basis."

Nonetheless, the push for better disclosure continues to be a major theme among industry players. Conference speakers generally feel that the situation has improved already, adding that disclosure is so important in pricing that it can dictate the difference between issuing and not issuing.

Questions from the audience

One attendee asked the panelists for a prediction on the size of the ECP market in 2008, presumably after the implementation of Basle II. The market today stands at approximately E80 million (US$94 million); almost half of the group estimated that it would reach E400 million in five years. "There is a strong demand for ABCP right now and there is a lot of room for smaller players to get involved," said one speaker. "We are seeing a number of lower-rated single-A banks getting into ABCP."

Their involvement adds a new level of competition that has resulted in a tier scenario between the bigger, better-established banks that can provide a better historical picture versus these smaller, "new kids on the block."

"The truth is that an issuer really competes against himself," said one speaker "If you want people to buy, it's down to structuring, a sound program, and communicating that well to investors."

Another theme was the initiation of same-day settlement in the European markets that would open up a secondary ECP market and facilitate the growth of the market going forward. "Overnight CP gives us diversification, and there is currently excellent demand for that paper," said one speaker.

Much of the data used in presentations was collected from an industry-wide poll conducted before the conference last week. Of those polled, 75% agreed with the panelist saying that same- day settlement would make a difference in the market.

Under European guidelines, portfolio managers face having to trade paper two days before the money comes in, which may be interpreted as doubling up on risk exposure. "For us, it will not change anything because generating a large amount of cash for that same day is impossible for us; nonetheless, some investors do see the two-day lag as an extra risk that could be taken away with same-day settlement," said one conference panelist.

Other results of the polling: More than 75% of those questioned also said they relied on the ABCP/ECP market to improve yield; 13% said they used the market to avoid event risk; 78% said they expected funds under management to grow in the next two years; and most expected growth to be generated by Euro paper. Credit risk was the biggest perceived threat for 37% of those polled, while 29% of market participants are still apprehensive about the final outcome of the Basle Accord.

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