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2004 should see rapid growth amongst Irish CD issuers and investors as the London market becomes increasingly complex Back  
As a result of clarification within the Finance Act 2003, it is now possible for Irish domiciled institutions to issue Certificates of Deposit within the London market and into the ICSDs, using a Tap CD facility rather than a formal ECP or ECD programme. These changes have brought CDs into line with the parameters within which ECP has historically been issued. Damien Donoghue addresses some of the most frequently asked questions in this regard.
Why issue London CDs versus more traditional instruments such as ECP?
There are three primary differences between these markets. Firstly, historical issuer profiles are very different. For those banks with the ability to issue CDs (see below ‘Who can issue CDs?’), access to the CD market is utilised, expanding into ECP with the usual aim of diversifying their investor base for short term paper. The ECP market runs parallel to the CD market offering corporates the ability to issue similar short term paper.

Previously Irish domiciled banks had fallen into the latter part of this analogy, but with the Finance Bill clarification last year, this has broadened the scope within which the Irish financial services market can operate.

These stereotypical issuer profiles are driven by the larger average tranche size in the CD market and the greater liquidity that exists in the secondary CD market. That said an issuing bank might find that one or other instruments does not fit within their natural investor base.

Secondly, 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, although the use of broker/dealers is not uncommon.

The third reason behind the greater attraction of CDs is the cost of setting up such a facility and the ongoing burden. Whereas an ECP programme requires a vast array of documentation, using the input of an arranger/lead manager and an external law firm, none of these are pre-requisites for a Tap CD facility (further detail regarding the setting up of a Tap CD facility can be found below).

General feeling within the market is that an ECP programme costs on average USD 30k to set up versus a potentially zero costing for a Tap CD facility.

Going beyond the initial set-up costs, it is typical for an ECP programme to maintain a rating with the rating agencies, which attracts a cost. Bank CDs are rated automatically because of a bank’s overall short term rating.

This final point regarding cost is an enormous attraction to those institutions that perhaps do not have an ongoing demand to issue short term paper, but find the set-up costs of ECP to be restrictive.

To put the above question into some perspective it is useful to comment on the London CD Market
The total size of the London market is about $ 470 billion U.S. dollar equivalent (Bank of England - November 2003). The domestic market, i.e. sterling denominated, represents approximately 53 per cent of this total and all other currencies, represents approximately 47 per cent. Within the non-sterling market, U.S. Dollar is the dominant currency making up some 85 per cent of the total segment.

By way of a comparison, the ECP market is of a similar size, some $465 billion U.S. dollar (Dealogic - November 2003). Whilst these markets are a similar size, the traits of the markets are very different with tranche sizes and liquidity being far greater within the London CD market - average tranche sizes within the CD market varying, dependent on currency, with sSterling trades at approx 10 million versus an average of 50 million for US dollar CDs.

Who can issue CDs?
The British Bankers Association (BBA) Guidelines state that a European Authorised Institution is eligible to issue London CDs. In addition to this, it is the expectation of the Bank of England that a legal entity may only issue via one arrangement so as not to confuse the investor base. This is best explained in the example of the London branch of a Dutch Bank who can issue CDs, but the Spanish branch cannot as the London branch is utilising the single access already.

In Ireland there are a large number of subsidiaries that operate independently regarding funding who are European Authorised Institutions in their own right and this is an acceptable form of access.

It is also the norm for London branches of non-European banks to be European Authorised Institutions in their own right for the purposes of issuing CDs or simply taking cash deposits.

Details of an institution’s status can be found on the Financial Services Authority Register - available at www.fsa.gov.uk/register

When considering the issuance of CDs it is imperative that the constraints laid out within the Finance Act 2003 are satisfied. The relevant parameters can be found within Chapter 3, Section 49 of the Act.

Where are CDs usually settled?
This is somewhat currency dependent with sterling denominated instruments being settled predominantly within Crest, in dematerialised form. Whilst euro denominated instruments are eligible within Crest, the majority of paper is settled physically in Euroclear, Clearstream or Bank One’s Depository and Clearing Centre (DCC). All other currencies, mainly US dollars, are usually settled physically within London, with approximately 90 per cent settled within the DCC.

In relation to the Finance Act 2003, Irish domiciled banks must deliver CDs into a recognised clearing system, those involved with London CD settlement being:

• Euroclear
• Clearstream
• Crest

Whilst the US domestic system, the DTC, is listed within the Finance Act, it is currently not possible to deliver CDs into DTC from the London market.

How to set up a Tap CD facility?
By definition a Tap CD facility is an unlimited programme unlike a usual ECP counterpart.
The facility consists of purely an Issuing and Paying Agency (IPA) agreement signed between the issuer and their chosen IPA. This documentation is normally provided free of charge by the IPA and is in standard form.

The only exception to this is for issuance into Crest, where further documentation needs to be addressed. The reason for the extra documentary burden is to address issues arising out of accessing a dematerialised settlement system.

Due to the standardised nature of the documentation of a Tap CD facility, it is possible to bring this product to market in a matter of a few weeks, rather than perhaps the months that an ECP programme would require.

Are Irish domiciled banks already taking advantage of this product development?
Historically Irish banks have accessed this market successfully via London branches so this product development is not entirely new.

With regards to new entrants outside of these typical issuers, the take-up has been impressive.

Outstandings are now in excess of $ 2.5 billion and growing strongly on a monthly basis. The most active issuers seen over the last year have taken very different approaches to their investor base, with one bank almost exclusively issuing to US Global custodians, in US dollars within the DCC, whereas another institution has issued mainly euros via Euroclear.

Looking at those banks that are currently seeking to come to market in Q1 2004 access to UK pension funds has been highlighted as an important consideration, achieving this by issuing sterling into Crest.

Bank One, through the DCC, has been extremely successful in being mandated for all of the current Tap CD mandates awarded within Ireland. This is on account of its unique ability to act as IPA, clearer and custodian within all of the recognised clearing systems referenced above.

What next for 2004?
Clearly the CD market in Ireland is still at an early stage of development and as a result 2004 should see rapid growth not only within market outstandings but also the diversity of issuers and investors.
More generally, established London based issuers and investors have started to look very closely at more complex CDs, starting with callable notes working up to index linked notes and credit linked notes.

A callable CD is a product that is in great demand, with settlement historically within DCC, Euroclear and Clearstream. These instruments cannot currently be settled within Crest due to systems constraints, being the amount of detail, which can be entered on a transaction. Crest has made a commitment to enable their platform to better address the settlement of callable CDs.

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