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Certificates of deposit - a welcome new addition to Ireland’s money markets Back  
Changes in the Finance Act 2003 have made it possible for Irish resident financial institutions to issue certificates of deposit (CD) to Irish investors. Already a market is developing with two institutions, UniCredito Italiano Bank (Ireland) plc and EBS Building Society, recently commencing CD programmes. In this Special Report we examine the issues.
This guide is the first time FINANCE magazine has produced an in-depth guide to CDs, which are very liquid negotiable instruments that are widely used for their flexibility as a short-term treasury management tool. The guide addresses the following topics.

• What is a CD?
• The history of CDs
• The role of CDs in short-term funding - A case study: DEPFA Bank
• Types of CDs
• What the Finance Act 2003 says
• Buying CDs
• London CDs v ECD
• Who can issue CDs?
• Where are CDs settled?
• How do you set up a tap CD facility?
• More complex CDs

CDs hit the headlines earlier this year due to certain changes in the Finance Act 2003 relating to D.I.R.T. (deposit interest retention tax), which meant that CDs can now be sold to Irish residents without collecting D.I.R.T., provided that certain conditions are met. The conditions are as follows - the CD clears through a recognised clearing system and has a minimum investment of €500,000, or, in the case of an instrument denominated in US dollars, a minimum investment of $500,000, or in the case of an instrument denominated in a currency other than euro or US dollars, the minimum investment will be the equivalent in that currency of €500,000. The recognised clearing systems include Euroclear, Clearstream and Depository Trust Co of New York.

In October, UniCredito Italiano Bank (Ireland) plc (UniCredito Dublin) launched a €5 billion London CD programme, while EBS Building Society has just launched a joint €1 billion euro certificate of deposit (ECD) and euro commercial paper programme.

Prior to the Finance Act, several other Irish banks already issued CD programmes from different issuers including Bank of Ireland, Anglo Irish Bank and DEPFA Bank.

DEPFA Bank has actually being selling its €15 billion euro CP/CD to Irish investors since 2000. It overcame obstacles caused by the collection of DIRT by issuing in the name of the main German subsidiary, DEPFA Deutsche Pfandbriefbank AG. In future the bank will continue to issue in the name of DEPFA Bank plc and DEPFA Deutsche Pfandbriefbank AG, offering investors the choice between Irish or German risk.

Bank of Ireland previously issued sterling London CDs out of its UK branch, and according to Vincent Digby, head of funding (liability management) with BOI, the Irish operations is actively considering issuing CDs.

Likewise IIB Bank has confirmed to FINANCE its interest in issuing the new product, with Mark Crowley, a dealer at IIB, saying that the bank is currently researching the product and expects to issue in early 2004.

CDs originated in the United States, but were introduced into Europe in the 1960s, with the first ‘tap issue’ in the London market-taking place in May 1966. Writing on page 7, John O’Farrell, head of treasury with UniCredito Dublin says that at the time, this was the first new money market instrument in London for nearly three quarters of a century. The London market is now worth approximately $470 billion.

CDs can be issued via a ‘tap’ facility, or via a more formal ECP programme. Damien Donoghue of Bank One says that there are three main differences between the two.

These are 1) historical issuer profiles are different, 2) the mechanism of placement is different with ECP being placed via a dealer panel, which attracts an associated cost, whereas the CD market tends to be directly placed via an institution’s own treasury desk and 3) the cost of setting up an ECP programme can be more prohibitive compared to a tap CD facility, moreover ECP programmes are typically rated by rating agencies, which also costs, whereas bank CDs are rated automatically because of a bank’s overall short-term rating.

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