Overnight indexed swap

Executive Summary

• In 2018, thanks to the granular data gathered via money market statistical reporting (MMSR), the Eurosystem was able to undertake for the first time a complete and thorough assessment of developments in the euro money market.
• Under MMSR the Eurosystem has been collecting daily data on all transactions conducted by the largest banks in the euro money market since the middle of 2016.
• In broad terms, this money market study re-affirms that activity in the euro money market is less diversified among segments than it was before the crisis.
• Based on a set of 38 large euro area banks which are common to the past survey dataset the Euro Money Market Survey (EMMS) and MMSR, it was possible to extract perspectives on historical money market developments.
• The former is partly explained by the fact that having access to the deposit facility has implications for transaction costs and liquidity flow dynamics.
• Developments in the various segments of the money markets relate to factors that are both exogenous and endogenous to the Eurosystem.
• As this money market study shows, since 2016 some money market rates have moved below the Eurosystems deposit facility rate (DFR), sometimes by a substantial margin, especially in secured markets.
• The Eurosystems policy framework provides an effective floor for the euro overnight index average (EONIA).
• Nevertheless, in 2017 the decline in core special repo and general collateral rates stabilised due to improved availability of core collateral.
• In addition, this study found evidence that the evolution of core repo rates mainly depends on the supply/demand dynamics of core assets.
• Other divergences, however, have been more lasting and seem to correlate with the evolution of excess liquidity levels.

Introduction

• The 2018 Money Market Study analyses the functioning of the euro money market since the middle of 2016.
• It represents the wholesale market for short-term funds denominated in euro, in which lending and borrowing of funds varies from overnight to one year.
• Participants in this market include banks (deposit-taking institutions), investment firms (financial corporations), companies (non-financial corporations NFCs) and central banks.
• To have more detailed and timely information, the ECB started collecting daily transaction-by-transaction data on the euro money market in 2016.
• The MMSR data cover four segments of the euro-denominated money market: unsecured transactions, secured transactions, FX swaps, and OISs.

1 The unsecured segment

• Since July 2016 activity in the unsecured segment of the money market has remained subdued in an environment characterised by a high level of excess liquidity, negative policy rates with the Eurosystems deposit facility rate (DFR) at -0.40% and a regulatory environment that is making unsecured funding less attractive.
• Owing to the very high level of excess liquidity and the forward guidance of the ECB, unsecured market rates remained close to the DFR in the shorter tenors of the money market curve, with activity concentrated mainly in the overnight tenor.
• In contrast to previous years, money market rates recently moved below the DFR, sometimes by a substantial margin.
• The largest share of the unsecured market is made up by borrowing transactions with other financial corporations and foreign banks.
• Interbank activity within the euro area represented just 15% of total activity in the wholesale unsecured money market.

1.1 Volumes

• Since the start of the financial crisis in 2008, trading volumes in the unsecured market have followed a declining trend (see Chart 2).
• Third, in 2016 the Basel Committee on Banking Supervision introduced two new requirements to mitigate systemic liquidity risk: the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR).
• Regulation made deposit-taking activity very costly in regulatory terms, especially for cash callable or repayable within 30 days and placed in non-operational accounts.
• Chart 2 Market shares of the daily average volume per quarter unsecured, secured, FX swap and OIS segments (EUR billions)


From the middle of 2016 to the end of 2018 the declining trend of activity in the unsecured market showed signs of stabilisation (see Chart 3). While part of the activity in the unsecured segment shifted to the secured segment between 2008 and the end of 2015, since then the downward trend in the unsecured segment has moderated. Chart 3 Turnover in unsecured and secured segments (index: Q2 2003 = 100)

• Since the implementation of the APP, the liquidity surplus has increased to about 1.8 trillion.
• The euro area liquidity surplus is mainly concentrated in France, the Netherlands, Germany and Belgium.
• At the end of each day, euro area banks redeposit these funds in their current accounts with national central banks (NCBs) or at the Eurosystems deposit facility.
• Chart 4 Total overnight flows between jurisdictions (connections: flows; nodes: total volumes)

1.2 Prices

• Between the start of the crisis in 2007 and the middle of 2016 unsecured rates remained anchored within the standing facility corridor.
• When central bank reserves are in limited supply i.e.
• Whenever there is a large amount of excess liquidity, the spread between the EONIA and the DFR narrows.
• This is because the DFR is the rate that determines the marginal cost of interbank lending when there is excess supply of central bank reserves.
• Chart 5 Key ECB interest rates, market reference rates and excess liquidity (left-hand scale: percentages; right-hand scale: EUR billions)
• TARGET balance data show that the APP gave rise to substantial cross-border flows in the money market.
• [2] Hence, banks are only willing to accept liquidity below 30 days at rates below the DFR to compensate for the higher regulatory costs.
• Nonetheless, the DFR generally remained a floor for interbank transactions within the euro area, as all euro area banks have access to the Eurosystems standing facilities.
• As a result, prices on the majority of interbank transactions within the euro area are on average at or above the DFR.
• The weighted average interest rate on the total overnight activity in the period from June 2016 to December 2018 was -0.34%.
• Hence, while the number of transactions in the interbank market is limited, lending by MMSR banks is still larger than their borrowing.
• Hence, banks are only ready to accept them at rates that compensate for the regulatory costs associated with such deposits.


Chart 7 Interbank overnight borrowing transactions within the euro area (left-hand scale: percentages; right-hand scale: percentage shares)
Transactions with NFCs are still priced well above the DFR (see Chart 8). Transactions with NFCs have always been executed at higher rates. While prices of transactions with NFCs have significantly declined in parallel with the growing excess liquidity, they continue to be priced well above the DFR. Chart 8 Total transaction prices by counterparty sector (left-hand scale: percentages; right-hand scale: EUR billions)

1.3 Counterparties

• Other relevant counterparties include NFCs, which represent around 20% of total transactions, and, to a lesser extent, central banks, with a 16% share connected to the management of their euro reserves.
• Transactions with governments account for less than 10% of the activity in the unsecured segment.
• Chart 9 Activity in the unsecured market by institutional sector (EUR billions)
• The APP did not lead to a proportional increase in excess liquidity in the jurisdictions of the securities issuers.
• While the geographical distribution of purchases closely reflected NCBs shares in the ECBs capital key, more than 50% of purchases occurred with counterparties belonging to banking groups whose head institution is located outside the euro area.
• In addition, within the euro area the management of euro-denominated liquidity is concentrated in specific locations.
• Chart 10 Location of other financial corporations depositing liquidity with euro area banks (connections: flows; nodes: total volumes)


Chart 11 Location of NFCs sending liquidity to euro area banks (connections: flows; nodes: total volumes)
Chart 12 Location of banks sending liquidity to euro area banks (connections: flows; nodes: total volumes)

1.4 Maturities

• On the borrowing side, between July 2016 and December 2018 the overnight tenor represented more than 50% of total turnover.
• These are not only deposits, but also call account/call money transactions representing money loaned by banks that must be repaid on demand.
• On the lending side, turnover is generally smaller and transactions are even more concentrated in shorter maturities.
• Of the total lending turnover, the overnight maturity bucket accounted for 74%, of which around three quarters was call accounts.
• From the middle of 2016 to the end of 2018 the unsecured yield curve moved downwards (see Charts 14 and 15).
• This was also the case for the overnight market, which is where most of the volume is concentrated.
• Prices for transactions with NFCs usually stood above the DFR for all maturities.
• Chart 14 Unsecured yield curve and volume evolution (left-hand scale: yield, percentages; right-hand scale: volume, EUR billions)


Chart 15 Unsecured yield curve and volume per counterparty sector in the second half of 2018 (left-hand scale: yield, percentages; right-hand scale: volume, EUR billions)

2 The secured segment

• The secured segment is the largest segment of the euro money market, representing two-thirds of total money market turnover.
• Overall, secured transactions have been on an expanding path since the financial crisis, driven by improved risk management and regulatory requirements incentivising participation in the secured market.
• Interest rates were typically below the DFR, sometimes by a substantial margin, depending on the collateral involved in the transaction.
• A significant part of transactions in the secured segment are repurchase agreements (repos and reverse repos) cleared through CCPs, reaching about 70% of total turnover by the end of 2018.
• The secured market is dominated by transactions with very short maturities.
• Transactions with a maturity of one week are the most numerous in the spectrum of longer maturities.

2.1 Volumes

• The secured segment is the largest segment of the euro money market, representing two-thirds of total money market turnover, and is an important contributor to the overall resilience and efficiency of financial markets (see Chart 16).
• Chart 16 Market share of the daily average volume per quarter secured segment (EUR billions)
• Volumes have increased significantly since the third quarter of 2016, as the repo market has largely become a platform for collateral exchange.
• Excess liquidity and regulation have led to a change in repo usage, which is now driven by collateral management rather than cash management.
• This can be seen from the fact that specific collateral volumes are much higher than general collateral volumes.
• [5] During the entire period, MMSR banks were more active in borrowing transactions than in lending transactions (see Chart 17).
• The overall share of repo borrowing transactions remained higher than reverse repo lending transactions for MMSR banks (55% compared to 45%, respectively).
• At year-ends turnover fell significantly, as banks usually aim to have a smaller balance sheet at reporting dates (see Chart 17).

2.2 Collateral

• For borrowing transactions, these six countries accounted on average for 84% of the collateral used.
• This was mainly due to an increase in the use of French and Italian collateral, while the use of collateral from the other countries remained more or less constant.
• As in borrowing transactions, German collateral is also the most used in lending transactions.
• In contrast to borrowing, in lending the combined share of these six countries was stable at around 88% throughout the reporting period, with the use of French collateral increasing and the use of Italian and Spanish collateral decreasing.


As a result, collateral used by MMSR banks is often non-domestic (see Chart 19).The country distribution of the share of domestic collateral in the euro area is centred around a median of 49%, and ranges between a 25th percentile of 22% and 75th percentile of 63%. In France and Germany, the use of domestic collateral is about 30% and 50% respectively. Chart 19 Origin of collateral by location of reporting agent (percentages)
The use of private collateral has become marginal (see Chart 20). The share of collateral issued by financial corporations decreased from 17% to 13%. One explanation could be that the APP has provided significant liquidity to financial corporations, reducing their need to tap the market for funding. Chart 20 Collateral used in secured transactions by issuer sector (percentages)

2.3 Prices

• Prices moved below the DFR (see Chart 21).
• The evolution of prices in the last two and a half years highlights how the repo market has largely become a platform for collateral.
• Chart 21 Short-term repo rate and excess liquidity conditions (left-hand scale: percentages; right-hand scale: EUR billions)
• Prices exhibited segmentation by collateral issuer, especially for the highest quality and most liquid assets (see Chart 22).
• Between regulatory reporting dates and without differentiating between general collateral (GC) and specific repo rates, the average transaction prices varied between -0.76% for borrowing against German government bonds and -0.48% for borrowing against Italian or Spanish sovereign bonds in the overnight, tomorrow/next and spot/next maturity buckets.
• The price of German sovereign collateral is fuelled by the strong demand for high-quality liquid assets (HQLA) and the impact of the APP on collateral supply.
• Chart 22 Weighted average one-day (overnight, spot/next, tomorrow/next) borrowing rates by location of collateral issuer (percentages)
• Close to the year-end, repo rates on the securities with higher ratings dip further down to levels significantly below the DFR.
• When the overnight bucket is analysed in isolation on the basis of daily rates, the year-end effect is very prominent, but some quarter-end effect can also be seen.
• Prices also exhibited segmentation on the basis of trading counterparties (see Chart 23).
• Interbank overnight repo rates were just below the DFR, while transactions with non-banks were always priced at rates well below the DFR.
• Chart 23 Prices by institutional sector (all maturity buckets) (percentages)

2.4 Counterparties

In the secured segment, CCPs are the main counterparties of MMSR reporting agents (see Chart 24). CCPs account for more than two-thirds of the turnover, with the remainder divided between other financial corporations and deposit-taking institutions. Chart 24 Monthly volume by institutional sector (all maturity buckets) (EUR billions)
• The share of transactions with CCPs increased between July 2016 and December 2017 and remained stable in 2018 (see Chart 25).
• On average, only about 30% of transactions were arranged bilaterally or via brokers, while 70% were cleared via CCPs (ranging from 56% to 94% in individual countries).
• The share of transactions with CCPs was slightly higher for borrowing than for lending in 2018 (70% for borrowing versus 68% for lending).
• Half of the counterparties in borrowing transactions are located outside of the euro area, while lending is more focused on euro area customers (see Chart 26).
• The dominance of borrowing transactions with foreign counterparties may be related to the fact that the 50 MMSR banks tend to be relatively large and may, for structural reasons, do more international business.

2.5 Maturities

• A majority of secured transactions are concentrated in the one-day maturity and up to one week buckets (see Chart 27).
• [7] The share of these short-term buckets in overall secured lending and borrowing remains very high (96% in 2018).
• This largely reflects the increasing importance of collateral-driven (specific) secured transactions which are typically executed at the spot/next tenor.
• Maturities of one month or longer are somewhat more popular in lending than in borrowing (see Chart 28).
• Most of the counterparties to whom the reporting banks lend for one, three, six or twelve months are either banks or other financial corporations.
• Most of the transactions with maturities above six months were reported by banks in Germany (in particular for lending) and France.


The term structure of the weighted average repo rates has an upward slope and borrowing rates are lower than lending rates (see Chart 29). Chart 29 Weighted average rate by maturity bucket (percentages)

3 The foreign exchange swap segment

• The US dollar is by far the most commonly traded foreign currency against the euro in the FX swap segment, capturing some 80% of volumes reported in MMSR statistics.
• This dominance of the US dollar in swap volumes is linked to the increasing demand for US dollars for hedging purposes and as a result of the US money market fund reform.
• The US dollar has traded at a growing premium for most of the review period, especially in the three-month maturity bucket.
• As to the maturities, most of the FX swap activity is concentrated at short-end maturities, partly to serve cash management purposes.

3.1 Volumes

• FX swap volumes in MMSR have been on the rise over the past few years, in line with the growth this market has exhibited on a global scale (see Chart 30).
• The most recent Triennial Central Bank Survey of foreign exchange and OTC derivatives markets conducted by the Bank for International Settlements (BIS) in 2016 found that, on average, daily global FX volumes were over USD 5 trillion, with FX swaps and forwards making up 60% of this total (the rest is largely options).
• After having continued on the growth trend observed since 2014, average daily volumes of reported FX swap deals in MMSR were just over 149 billion in 2017.
• The overall volume of reported FX swap activity continued to rise each quarter from the first quarter of 2017 to the second quarter of 2018 (by 15% in total), followed by a small moderation in volumes thereafter.
• Chart 30 Market share of the daily average volume per quarter FX swap segment (EUR billions)
• As the chart shows, 81% of all FX swap activity in MMSR was reported against the US dollar.
• The volumes reported in MMSR could be inclined towards the use of US dollars in the FX swap market owing to banks FX trading strategies and associated market liquidity patterns, whereby the US dollar is the most systematically used currency (and thus the most liquid), as further detailed below.
• The overall currency split was quite stable between the third quarter of 2016 and the fourth quarter of 2018.
• Anecdotal evidence suggests that the dominance of the US dollar in swap volumes is partly linked to the way some euro area banks run their FX swap books internally.
• Chart 31 Currency breakdown of FX swaps against the euro (percentages; July 2016 to December 2018)

3.2 Prices – developments in EUR/USD relative costs

• Analysis of the FX swap market shows that the US dollar traded at an incremental premium for most of the review period (see Chart 32).
• As can be seen from the chart, the EUR/USD forward points[10] i.e.
• [11] Chart 32 Evolution of EUR/USD forward points (left-hand scale: forward points; right-hand scale: forward points)
• Between July 2016 and December 2018, the Federal Reserve hiked interest rates eight times, raising the federal funds rate from 0.50% to 2.50%.
• The rising level of the US dollar LIBOR has led to an increase in US dollar borrowing costs, while EURIBOR levels have remained almost unchanged.
• This substantially increasing spread between the two rates explains most of the increase in EUR/USD forward points over the period.
• Chart 33 EUR/USD three-month unsecured rates and EUR/USD cross-currency basis (left-hand scale: percentages; right-hand scale: basis points (bps))
• This component can be traced in the cross-currency basis swap market.
• The EUR/USD basis swap represents the additional premium/discount, beyond the interest rate differential, that an investor must factor in to swap euro for US dollars for three months, e.g.
• reflecting funding premia/discounts specific to the cross-currency swap market that might relate to funding currency availability/tightness.
• The high proportion of FX swaps involving US dollar conducted in the euro area highlights the importance of the cross-currency basis swap market for euro area participants.

3.3 Counterparties

• While different degrees of concentration can be observed in the FX swap market for reporting agents and transacting counterparties, geographical location does not appear to play a major role in the pricing of FX swaps.
• From a participation perspective, the interbank market still makes up by far the largest share of the FX swap market by volume.
• Chart 34 Geographical breakdown of FX swap activity by jurisdiction of financial corporations transacting with MMSR reporting agents (percentages; July 2016 to December 2018)

3.4 Maturities

• It is worth noting that 26.5% of all FX swaps do not fit into any of the usual duration tenors.
• This suggests that many FX swaps are constructed as bespoke over-the-counter (OTC) transactions between two counterparties to cover very specific dates.
• The maturity split remained fairly stable in the period between the third quarter of 2016 and the fourth quarter of 2018.
• Chart 35 Average maturity horizon of FX swaps (percentages; July 2016 to December 2018)

3.5 The relationship between FX swap market rates and participation in the Eurosystem’s US dollar tenders

• Since then the Eurosystems US dollar operations have been priced at a premium over the almost risk-free US dollar OIS rate at equivalent maturity.
• Participation in the Eurosystems one-week US dollar operations is generally limited, but with seasonal increases that can be considerable (see Chart 36).
• The chart indicates that participation in the Eurosystems (currently one-week) US dollar tenders often exhibits a quarterly pattern.
• [13] Chart 36 Eurosystem US dollar tender interest rate versus implied FX swap rate (left-hand scale: percentages; right-hand scale: EUR billions)
• Based on anecdotal feedback (which is backed by MMSR data), up until the 2016 year-end banks largely engaged in US dollar funding activities ahead of reporting dates in the last few days preceding such reporting dates.
• However, typically around 70-80% of banks US dollar funding activities in the FX swap market was still left to the last week ahead of a reporting date.
• As counterparties adjust to these market dynamics, premia will remain susceptible to funding activities under conditions of reduced market depth.
• Chart 37 US dollar pre-funding activities by MMSR banks to cover selected quarters relative volumes and implied rates (percentages)
• MMSR data show that the net position of MMSR banks vis--vis their counterparties has been on the net US dollar lending side since the middle of 2017.
• Instead, anecdotal feedback suggests that occasional or seasonal US dollar funding tensions might be traced back to temporarily fluid pricing equilibria or temporarily reduced market depth.
• Chart 38 Net US dollar position of FX swap market participants in MMSR data (left-hand scale: EUR trillions; right-hand scale: EUR billions)

4 Overnight index swaps

• An analysis of pricing features in OIS transactions shows a rather narrow spread between spot and forward settlement transactions.
• Both spot and forward transactions in MMSR data have very good proximity to market OIS quotes.
• From a geographical perspective, counterparties located in Germany and France account for more than 80% of the activity in the OIS market.
• Participants access the OIS market for hedging, portfolio rebalancing and positioning for possible central bank rate movements.

4.1 Volumes

• Volumes in the OIS market tend to be considerably lower than in pre-crisis times, while intermittent spikes can be observed (see Chart 39).
• During the period under consideration, OIS volumes have periodically showed signs of upward volatility since the market reached all-time lows in 2016.
• Chart 39 Market share of the daily average volume per quarter OIS segment (EUR billions)


OIS transaction volumes suggest a stable long-term average daily volume, with occasional upward deviations (see Chart 40). The monthly cumulative volumes presented in the chart suggest that OIS market transactions in MMSR data have a daily average turnover of around €40-50 billion, as a minimum, over the review period. Chart 40 Monthly cumulative volume of transactions in the OIS market (EUR billions)

• MMSR data show that the volumes recorded in normal circumstances are broadly equally split between spot and forward transactions (see Chart 41).
• Overall, while in broad terms spot and forward volumes were equally split on regular trading days (see All days in Chart 41), forward volumes were more volatile than spot market volumes over the review period.
• Regarding the pattern of daily trades, MMSR data show that volumes in the OIS market are higher than average on days when there is a particular focus on monetary policy expectations and large market reactions.
• The chart shows that OIS volumes are generally higher on days of heightened market interest, when compared to their daily averages since July 2016.
• Chart 41 Average volumes for immediate settlement and forward-dated OIS contracts (EUR billions)
• The OIS market is characterised by balanced liquidity conditions on both trading sides (see Chart 42).
• Daily OIS traded volumes (for any maturity) in the MMSR dataset corroborate the view broadly reported by market makers that liquidity in the OIS market is good and two-sided, as illustrated in the chart by the narrow spread in terms of volume and number of transactions between transactions receiving the fixed rate and transactions paying the fixed rate.
• Chart 42 Spread in number of transactions and traded volume between OIS contracts paying and receiving the fixed rate (left-hand scale: EUR billions; right-hand scale: units)

4.2 Prices: OIS levels and relevance for rate expectations

• Transaction-level MMSR OIS data show a rather narrow spread between the two sides of the OIS market across maturities (see Chart 43).
• The chart shows the volume-weighted average pricing in outstanding OIS contracts paying or receiving the fixed rate across maturities on a daily basis.
• This largely reflects the pricing of longer-term contracts which takes into account the positive rate outlook, as reflected in market expectations.
• It is clear from the chart that the pricing is very closely aligned for OIS contracts paying or receiving the fixed rate for any maturity up to the end of 2019.
• Chart 43 Volume-weighted pricing in OIS contracts paying/receiving the fixed rate across maturities (y-axis: left-hand scale: percentages; right-hand scale: basis points)
• MMSR data confirm that individual transaction data on OIS contracts with either immediate or forward-dated settlement are closely aligned with commercially available market quotes, on both the receiving and the paying side.
• This implies that the explanatory power of MMSR pricing data on OIS contracts is broadly similar to that of commercially available data regarding monetary policy expectations.

4.3 Counterparties

• MMSR data cannot confirm this range of counterparties, as the bulk of transactions listed involve CCPs.
• In recent years the share of centrally cleared transactions has been increasing, largely due to regulation (see Charts 44 and 45).
• Structural developments over the past five years have shifted activity from bilateral trading and clearing to CCPs.
• The main reason for the shift to CCP clearing is regulation, as banks are obliged under EMIR to trade interest rate swaps via CCPs.
• The obligation to have CCP clearing for OIS contracts denominated in the G4 currencies entered into force progressively over the period under review, beginning on 21 December 2016 for financial counterparties above a certain threshold.


Chart 45 Counterparties as a percentage of total volumes (paid and received)

• MMSR data indicate a strong concentration in terms of counterparties as well as countries out of which participating banks operate (see Chart 46).
• When considering the reporting agents countries of origin, France accounted for 62% of all MMSR reported volumes, followed by Germany with 20%.
• Chart 46 Share of transactions by country of origin of the reporting agents (percentages; July 2016 to December 2018)

4.4 Transaction maturities

• Looking at transactions where the reporting agent paid or received the fixed leg in the spot market, the highest volume can be found in the three-month maturity bucket, followed by up to one-month, twelve-month and six-month buckets.
• While volumes in several buckets increased between the middle of 2016 and 2018, it is the three-month bucket that experienced the largest increase (35%).
• It may also be noted that the number of transactions remains relatively high for some longer maturities, while volumes are relatively low, which suggests that the average ticket size decreases for longer maturities beyond one year.


Chart 48 Number of transactions by maturity bucket (units)

5 Short-term securities

• The STEP market saw relatively stable volumes during the whole financial crisis, while the NEU CP market experienced a steep decline.
• Focusing on the last two and a half years, statistics show a mild recovery in the NEU CP market.
• At the end of 2018, about 400 billion of short-term securities with the STEP label and 325 billion with the French label were outstanding.
• A number of NEU CP securities also carry the STEP label, hence both statistics overlap considerably.
• On the demand side, money market funds (MMFs) have traditionally been responsible for a large part of the take-up of short-term paper.

5.1 Volumes

• In the euro area, there are two major labels for short-term paper: STEP and the French NEU CP.
• This includes CDs and CP as the most common types of short-term securities.
• Other short-term securities, such as floating rate notes and asset-backed CPs have significantly lower volumes.
• The French NEU CP (formerly TCN) market,[19] which includes CDs, CPs and medium-term notes (MTNs), used to be the most important short-term securities market in the euro area.
• By the end of 2018, 45% of STEP paper outstanding consisted of NEU CP paper.
• From an historical perspective, STEP volumes have remained relatively stable over time, while the French NEU CP (formerly TCN) market saw a steep decline in the period 2013-2016 (see Charts 49 and 50).


NEU CP and NEU MTN (formerly TCN) outstanding amount (EUR billions; all currencies – tenors up to two years)

• The outstanding amount of commercial paper showed a downward trend until the first quarter of 2013, after which it stabilised and subsequently made a moderate recovery (see Chart 51).
• Chart 51 (EUR billions, monthly data)
• Dealogic data show a faster recovery for CDs since 2016.
• More recently, the upward trend has been interrupted, with the outstanding amount declining to 30 billion at the end of 2018.
• Chart 52 Certificates of deposit outstanding amount (EUR billions, monthly data)

5.2 Prices

Yields in the primary market

• CP is sold at a discount relative to its face value, and the pricing of CP depends on the rating of the issuer.
• Yields reached negative territory in June 2014 after the introduction of negative interest rates on the deposit facility.
• STEP paper with a tenor of 0-7 days also frequently shows yields below the overnight benchmark rate, EONIA, which has been the case consistently since October 2016.


Chart 54 STEP yield and volume: total vs. MFI issuance (x-axis: tenor, days; y-axis: left-hand scale: percentages; right-hand scale: gross issuance, EUR billions)

5.3 Counterparties – investors and issuers

• Traditionally, money market funds (MMFs) are significant investors in short-term securities, providing a stable demand for issuers (see Chart 55).
• MMF holdings decreased significantly during the financial crisis, as well as during the European sovereign debt crisis.
• This decrease continued in the post-crisis conditions of excess liquidity, but reversed in 2014, when the negative DFR was introduced.
• The take-up of CP by UK investors and other financial corporations increased significantly (see Chart 56).
• MMSR data show an increase in the take-up by UK counterparties from 30% in the third quarter of 2016 to 37% in the fourth quarter of 2018.
• The MMSR database uniquely allows analysis of the counterparties who take up paper in the primary market for maturities of up to one year.


The main issuing sector for both STEP and NEU CP paper is the MFI sector, with a share of between 60% and 75% of total outstanding amounts (see Charts 57 and 58). Public issuers account for most of the remaining outstanding amounts of STEP paper, while corporates dominate the remaining outstanding amounts for NEU CP paper. Chart 57 STEP outstanding amount by sector (EUR billions, average per quarter)
Chart 58 NEU CP outstanding amount by sector (EUR billions, average per quarter)
About 70% of STEP paper is denominated in euro, while most other paper is denominated in US dollars or pounds sterling (see Chart 59). Chart 59 STEP outstanding amount by currency (EUR billions, average per quarter)

5.4 Maturities

Issuance of STEP paper has been relatively stable over the different tenor buckets (see Chart 60). The distribution of issuances over the different tenor buckets also remained relatively stable, with the exception of the first quarter of 2017, when there was an increased issuance of STEP paper with short maturities (0-7 days).