EC Securities Regulation Paola Lucantoni Economic and Financial Market Law.
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Transcript of EC market
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EUROCURRENCY MARKET
Euro market is the market for international finance. Euro Dollar, Euro currency,
Euro equity, Euro Bond, Euro notes etc is a generic term used to explain currencies and
financial instruments transacted out side county of its issue. Euro dollar are dollarswhich are transacted b banks and !lobal firms outside U"A. It is major source of
international finance and credit. It is a wholesale market for internationally accepted
hard currencies and financial instruments. The market in which orrowing and lending
in Euro instruments takes place is called the Eurocurrency market. #t has two sides ie
su$$l and demand for Euro currenc.
"u$$l of Euro currenc comes from high net worth indi!iduals, gloal anks and
cash rich corporate houses They park their surplus funds in Euro currency market to
earn attracti!e return. %emand for Euro dollar comes from "loal anks, #$%s ,
"loal firms, and national go!ernments are the orrowers of Euro currency to meettheir short term foreign currency requirements Euro credit, Euro currency, Euroond &
Euro equities are the major components of Euro dollar market.
Ori!in of the term Euro currenc
The term Euro currency had its origin from the term 'Eurodollar(. Traditionally )*D
was treated as the most stale currency. European In!estors, especially in!estors from
)**+ region used to keep their surplus funds in )* anks in Dollar terms. ence such
deposits were known Euro dollar deposits . -ith the outreak of cold war, Due to the
fear of loosing their assets, they mo!ed those deposits to Banks in European and sianfinancial centers. Thus Euro dollar market ecame Euro currency market
/urther, -ith the great depression of 01234s the dollar lost its significance as key
currency , and other European currencies such as pound sterling, 5en, Euro etc ecame
key currencies . Thus gloal in!estors got alternati!es. In!estors preferred to keep
deposits in other currencies and start depositing in other financial centers especially in
European Banks . The market ecame gloal and the. Euro dollar ecame Euro
currency.
The prefix 'Euro( is now outdated ecause Euro currencies and other financialinstruments are regularly traded outside Europe, especially in *ingapore and ong
6ong, Tokyoetc . Thus, Euromarkets are also referred to as 'offshore( market if such
deposits ha!e more widespread geographical ase
Features of the Euro currency market: 07 #nternational Market& The Euro8
dollar market is a world wide market. This market accepts deposits in dollars and major
currencies all o!er world and also ad!ances are gi!en in required currencies.97 'ree
of !o(ernment re!ulations: Euro currency is generally outside the direct control of
any national go!ernment. $either the currency issuing country nor the host country has
any control o!er Euro currency. 27 "hort)term 'unds& The maturity nature of such orrowing and landings are as short as one day to six months. ;7 Close maturit of
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assets and liabilities& There is a close matching of the maturity structure of assets
<loans7 and liailities <deposits7.This minimi=es the risk associated with interest rate
fluctuations. >7 *holesale market: Eurocurrency market is a wholesale market. The
minimum si=e of indi!idual transaction is ao!e ? 0 million @7 #nter)+ank
$artici$ation& It is mainly an inter8ank market in which the Euro anks orrow andlend from each other.
ECONOM#C #M,ACT O' EUROCURRENCY MARKET
07 The Eurocurrency market facilities short)term ca$ital flows.
97. No control on euro currenc and euro instruments. The national monetaryauthorities ha!e no control on such currencies and instruments and this make monetary
policy ineffecti!e
27 Euro instruments hel$s to im$ro(e !lobal -iuidit *ince the Eurocurrency
market can e a source of international liquidity. ence it contriute to inflationarytendencies in the world economy.
;7 The Eurocurrenc market source of credit for the nations facing BA deficitnations. The Eurocurrency market helps the central anks to postpone the needed BAadjustment measures.
>7 #n(estment A(enue Euro currency market is a profitale in!estment a!enue for thelarge corporate & commercial anks to deploy their surplus fund.
@/ It is a source of finance for e0$orters and im$orters.
1/ Eurocurrency market is a source of finance the economic de(elo$ment $ro!ramof many emerging markets economies
2uestion& Explain the meaning and features of Eurocurrency market. < CC Imp7
Reasons for the growth of Euro currency market.
U" dollar as a ke currenc: The main reason for the growth of Eurocurrency market
was the special status of the )* dollar as a key or !ehicle currency. Because of this
special role of the dollar as a key currency, foreign indi!iduals, corporations and
go!ernments preferred to hold dollar alances.
3u!e demand for Ke currencies& The growth in the !olume of international trade
has created a huge liquidity gap. The euro currency market was the final solution to the
liquidity prolem. Because of this special role of the dollar as a key currency, foreign
indi!iduals, corporations and go!ernments preferred to hold dollar alances.
Out break of Cold *ar& In the 01>3s *o!iet )nion was earning dollars from the
export of gold and raw materials. They considered )* as a safe hea!en to park their
funds. -ith the out reak of cold war in 01>3s , *o!iet )nion and East European
nations to shift their dollar deposits from merica to Euro anks for fear that they
might e locked y the merican "o!ernment, in case of a war
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'low of U" Aid& fter 9nd world war , )* was emerged as the most powerful nation .
They ad!anced huge sums of money on the rehailitation of Europe, leading to the
transfer of a large sum of dollars to European anks.
+O, %eficits in U". 4 Re!ulation 2: *ince 01@2, the )* followed tight money
policy and other anking regulations to deal with their financial prolem. s such
regulations were not applicale to offshore anks, merican anks set up susidiaries
aroad and mo!ed funds outside to escape regulations.
#nterest euali5ation Ta0& During 01@3s, European nations were accumulating dollar
resources y Issuing onds in )* markets and therey huge out flow of dollar. To deal
with the crises, )* introduced a tax called interest equali=ation tax . The European
orrowers had to turn to other alternati!e source < Euro currency market7 for dollar
,etro) dollar de$osits b O,EC Countries: The "ulf oom and susequent increase
in the oil prices since 012 has resulted in the huge accumulation of dollar y AE%countries , popularly known as etro Dollar. They were deposited outside "ulf region
especially in Euro anks.
Con(enience in holdin! balances abroad: International corporations often found it
!ery con!enient to hold alances aroad for short periods in the country in which they
needed to make payments.
O(ercome %omestic Credit Restrictions: n important reason for the growth of the
Eurocurrency market is that, the international corporations can o!ercome domestic
credit restrictions y orrowing in the Eurocurrency market.
#ntroduction of Ca$ital account con(ertibilit: The introduction of currency
con!ertiility in late nineties & relaxation of exchange controls y many nations,
pro!ided a fresh support and free mo!ement of Euro currencies across the world.
Question : Discuss the reasons for the growth of Eurocurrency market . < CC Imp7
"E6MENT" O' EURO)CURRENCY MARKET8
Euro currency market has een di!ersifying during the past three decades into a numer
of su8markets, such as the euro ond market, euro equity market, sia8 dollar market
and so on
Time de$osits& large part of money in the Euro currency market held in fixed8ratetime deposits.
Certificates of de$osits& nother important instrument is the Eurocurrency certificatesof deposits . %Ds are issued y anks to raise funds large denominations
Eurodollar floatin! rate C%s and Eurodollar floatin! rate notes& They help tostaili=e the principal !alue of the paper.
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Euro credit and Euro notes: #ajor part of the lending in Euro currency
market is in the form of Euro credit.8 Euro credits are short and medium term loans to
gloal corporate, #ultinational companies and national go!ernments. Euro8credits
elong to wholesales sector of the International %apital market and normally in!ol!e
large amounts. Euro8credits are issued mostly without any collateral security. It is amajor source of credit in foreign currencies.
EURO)+ON%":
The Euro ond market is the International capital market Into which a large ount of
long term capital has een channeled internationally. International ond Issues are not
new. They ho!e een in existence since the early 01Ih century. During the 01 th century
ury, many ).*. loans were Issued In Europe In terms of dollars. In Fiose days Issuing
expertise was pro!ided y the experienced anks and there was no go!ernment
restrictions on kitematlonal capital mo!ements, Exc the experiei6cu #umw was!irtually unknown and the capital lending countries had no BA prolems.
The Euro8onds are a special type of lower cost International onds. They are long8
term det securities that are sold outside the orrower4s country to raise long8term
funds in a currency other than the currency of the county where the onds are sold.. /or
example, an )* corporation selling onds in Gondon denominated in Euro or )*
dollars. The Euro8onds are sold for International orrowers in se!eral countries
simultaneously y the International group of anks, in the currencies of the countries
where they are issued.
I. Euro8onds ore those delierately offered for sole in more thon one country
simultaneously through International syndicate of underwriting ig and selling anks.
-hil some foreign onds may e ought y residents of se!eral countries usually they
ore intended for sale into in!estors in host nation. The )s dollar has een the most
popular denomination currency for con!entional Euro8onds.
*ome euro8onds ha!e important equity options. )nder this category the ond holder
otains the enefit or right of con!erting onds into equity.
7/ The are the main source of funds in Euro currenc markets .. There are differenttypes of Euro8onds such as straight or fixed rate onds, Deep discount onds, Hero
coupon onds, %on!ertile onds, and %urrency option onds etc.
97 Eurobonds are different from forei!n bonds . /oreign onds refer simply onds
sold in a foreign country ut denominated in the currency of the country in which the
onds are eing sold. Euroonds are usuall unsecured, that is, they do not require
collateral, while domestic onds are secured. "horter maturities than the domestic
bonds. large majority of Euroonds are of fi!e year maturities. The annual coupon on
Euro con!ertile ond is normally lower than other onds.
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27 The carr ,ut and Call O$tions: The issuing company has a right of call option,
that is, an issuing company can uy ack the onds y gi!ing a notice of its intension to
uy. The in(estor has a $ut o$tion, that is the ond holder can sell the onds ack to
the issuer.
;7 The leadin! centers in the Eurobond market are Gondon, /rankfurt, $ew 5ork
and Tokyo.
EURO E2U#TY&
In recent years reputed Domestic firms raise long funds y issuing equities in home
country and foreign markets . Euro equity issue refers to a process wherey a company
raises funds through the sale of equities using "loal Depository +eceipts <"D+7 as a
financial instrument. They are denominated in currencies other than the home
currency of the issuing company.
It is an important source of international finance for !loball re$uted firms. Euro
equity is issued simultaneously in !arious financial markets. They are issued in more
than an one foreign market, except in the domestic market
Through euro equity, reputed firms collect foreign funds for their gloal operations. The
issues are managed y a consortium of in!estment anks. They are also listed in
leading stock exchanges of the world . Ance issued, euro8equities are listed at least on
the computer screen quoting system of the International *tock Exchange <I*E7 in
Gondon.
unit of "D+ represents one or more shares of a sponsored or issuing company. They
are proportionally priced and issued to gloal in!estors. The issuing company deposits
an equal amount of its shares with the depository ank. The depository anks then sell
the Euro equities through depository receipts.
The in!estor does not get the possession of shares ut only the depository receipts.
"D+s holders ha!e no !oting rights unless "D+s are con!erted to shares.
Raisin! funds throu!h euro euit in(ol(es the followin!
"$onsor or #ssuin! Com$an :: It is the company which desires to raise capital
through euro8equities.
%e$ositor +ank :: It prepares and issues "D+s against the deposited original shares of
the company. It also appoints a local custodian. It is responsile for issuing and
cancelling of "D+s.
#n(estment +ankers: They form the syndicate of participating anks. elp in
completing all the technical and issue requirements.
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Custodian& It holds the underlying ordinary shares of "D+s. It works as a local agent
for depository ank.
The im$ortant stock e0chan!es which deal in 6%Rs are & <07 Gondon *tock
Exchange <97 Guxemourg *tock Exchange <27 Duai International /inancial Exchange
and <;7 ong 6ong *tock Exchange.
Indian companies which are listed and ha!e a consistent track record of past three years
can market euro equity through "D+s. This requirement was relaxed for raising ftmds
for infrastructure projects.
2uestions: -rite notes on Euro credit ,Euro onds& Euro equity <*egments of Euro currency #arket 7