Euroclear, Clearstream, DTCC Team for ECP Hub
June 26, 2001
Euroclear, Clearstream International and the Depository Trust & Clearing Corp. will jointly develop a central communications hub that will automate the sale and processing of European commercial paper and related money market instruments.
The hub-to be called the European Pre-Issuance Messaging (EPIM) service-will go live in late September and electronically link all parties involved in the issuance of euro commercial paper, including banks, dealers, numbering agencies, issuing and paying agents and depositories. Among the network providers being considered is Radianz, a joint venture between Reuters Group Plc and Equant.
The EPIM service will be the second automated pretrade communications hub for ECP. J.P. Morgan Institutional Trade Services, the global trust arm of J.P. Morgan Chase, and Goldman Sachs, among others, are already using a competing service called IssueLink, a Web-based version of CapitalNet's software, which went live several months ago. CapitalNet, is a joint venture of Euromoney and Compusoft.
Automated communications systems are considered key to the development of the eurocommercial paper market, which is estimated at $250 billion-a fraction of the U.S. $1.7 trillion market. With the exception of French euro commercial debt, most of the European markets settle ECP on a T+2 cycle, in contrast to same-day settlement in the United States.
The EPIM service will be owned equally by Euroclear, Clearstream and DTCC and operated by DTCC. It will be based on PIM, the Pre-Issuance Messaging service created by a DTCC subsidiary, the Depository Trust Co. (DTC) introduced in the United States in 1999. So far, EPIM has received commitments from two paying agents and one broker-dealer.
DTC's PIM processes about 270,000 messages on U.S. commercial paper per month, settling $143 billion worth of debt each day.
"It is an industry objective to reduce processing costs by relying on existing infrastructure and DTC was selected because of its experience in U.S. commercial paper," said Pierre Slechten, managing director at Euroclear in Brussels, who is coordinating the project for his depository. Indeed, because EPIM is reliant on DTCC's computer mainframe at its New York City headquarters, the development costs will be minimized- to several million dollars-and time to market to under a year.
EPIM will also rely on proprietary message types developed by the DTC for the PIM service, but additional fields will be added for Eurocommercial paper such as foreign exchange.
Unlike EPIM, IssueLink uses only Clearstream to issue ISIN numbers and IssueLink is not endorsed by the European Commercial Paper Association, the europaper trade group.
Euroclear decided not to participate in the IssueLink service citing concerns over technology issues. Dan Kuhnel, senior new issues manager for Clearstream, said that the international depository opted to join the IssueLink service as an interim step until the EPIM service was launched. "We will continue supporting the IssueLink initiative until the market decides to use only the EPIM service but are happy to support both if our clients wish us to do so," he said.
"This initiative is what the market needs to support the growth of commercial paper in Europe by introducing greater automation and same-day issuance capabilities," said John Ford, chairman of the ECPA and a Deutsche Bank executive.
Deutsche Bank is one of the largest eurocommercial paper traders and paying agents; others include J.P. Morgan Chase, Citibank and BankOne; active broker-dealers include Goldman Sachs and Lehman Brothers.
Currently in Europe, investors negotiate prices and trades with a bank dealer who then has to notify the issuing and paying agent, who in turn contacts either Euroclear or Clearstream to obtain an ISIN number for the trade. The ISIN number is then communicated back to the paying agent and the dealer, after which the investor then notifies its custodian bank of the transaction and ISIN number. The custodian bank then contacts the depository to settle the trade.
Under the EPIM service, the dealer will electronically request that either Clearstream or Euroclear issue an ISIN number for the commercial paper trade. Either of the depositories will allocate the ISIN number and send it to the dealer. The dealer will then send a settlement instruction to Euroclear or Clearstream. The settlement of the trade will be the same as occurs today: the issuing and paying agent bank will credit the securities to the dealer against payment and will instruct Euroclear or Clearstream to pay the CP issuer.
Connie Pinilla, a director in DTC's international division in charge of the PIM and EPIM services, said the key difference between PIM and EPIM is that EPIM will allow the dealer and the issuing and paying agent to obtain and ISIN number through the hub from Euroclear and Clearstream which issue identification numbers for eurocommercial paper. By contrast, in the United States, the identification number is pre-issued by the CUSIP Service Bureau, based on an algorithm defined by the maturity date of the commercial paper.
"The key benefit of the EPIM service lies in obtaining an ISIN number electronically," said Pinilla. "That means saving as much as two days worth of effort."
She could not quantify the cost savings from the venture which like DTC will run as a nonprofit entity; users will pay two separate fees: a communications fee and a settlement fee to Euroclear or Clearstream. Combined, Slechten estimated that it could cost a user about $4 to $5 per trade to process a eurocommercial paper trade.