EACT responded to the EU Commission’s consultation on CMU mid-term review in March 2017

The EACT (European Association of Corporate Treasurers 13.000 members across Europe) welcomes the opportunity to respond to this consultation. It is supportive of the Capital Markets Union (CMU) initiative and support the Commission’s agenda for jobs and growth. The CMU project can deliver concrete benefits to non-financial companies by creating a well-functioning single market for capital and ensure diversified funding sources. Its first comment relates to the on-going Commission review EU corporate bond markets. EACT supports and understands the need to analyze more in-depth the functioning and possible problems in this market. It would however caution that any practical solution for improving the functioning of the corporate bond market should not in effect lead to worsened conditions for corporate bond issuers. This holds particularly true with regard to the push by certain market participants for further harmonization of issuance. Whilst harmonisation may bring benefits to certain market participants, EACT

members are against any developments that would make bond issuance disconnected from issuers’ underlying funding requirements, which are not susceptible to harmonisation. Such developments would go completely against the very objectives of CMU of diversifying companies’ funding sources and facilitating capital market access and would make funding by capital markets more inflexible, possibly deterring issuance. In general the current situation with market liquidity is not a major source of concern for corporates. Typically corporates have not

experienced liquidity issues in the primary issuance market. There are mixed views as to whether secondary market liquidity has in fact deteriorated but even if secondary market activity is thin at times, this has generally not impacted corporates’ ability to understand pricing dynamics and issue in size if necessary.

EACT supports standardisation of documentation but strongly opposes standardisation of issuance conditions, sizes, maturity dates or similar. Harmonization would dramatically reduce corporates’ flexibility to fund when required in line with their business needs and cash flow cycles. Issuance window opportunities are already limited due various factors (“closed periods” before results announcements, market “holidays” e.g. August in Europe, availability of internal

resource, time taken to prepare issues etc.) and cannot be further limited. Standardizing issuance timing or size could prove very counterproductive by creating liquidity problems for issuing corporates and by impacting pricing competitiveness. Underlying business flows can take place on any day of the year and are variable in volume, therefore standardizing will impair companies’ ability to match bond issuance with their funding needs. Moreover, standardization might in effect lead to worsened liquidity and saturation of the market if issuers are forced to issue on

same dates.

EACT wanted also to raise is the impact of clearing and margining requirements for OTC derivative transactions on non-financial counterparties (NFCs). Currently NFCs that do not exceed defined thresholds for their non-hedging transaction benefit from an exemption for such requirements.

It likes to reiterate that it is vital to maintain this exemption with the forthcoming EMIR review, as otherwise EU corporates would have to post hundreds of billions of EUR as collateral, therefore considerably reducing funds available for investment and growth. Furthermore, the current EMIR framework should be amended with regard to non-financial counterparties above the defined clearing thresholds that are subject to clearing and margining requirements (NFC+s). EMIR puts an obligation on non-financial counterparties exceeding the clearing threshold in one asset class

to centrally clear or exchange bilateral margin for all transactions in all asset classes, including hedging transactions. In EACT’s view the current design is illogical and counterproductive from a broader economic perspective as it effectively withdraws liquidity from companies for transactions that are not risky to the financial system. The balance sheets of NFC+s are likely to be significantly impacted by EMIR margining requirements. Imposing variation margin on hedging transactions below the clearing thresholds will expose NFC+s to daily volatility up to the settlement date of the underlying commercial transaction and will entail higher levels of working

capital. This will divert financial resources that could otherwise be invested in the real economy.

Therefore NFC+s should have an obligation to centrally clear or exchange margin only their nonhedging transactions for the asset class above the clearing threshold but should benefit from the same exceptions as NFC-s for their hedging transactions.

F. Masquelier, Honorary Chairman of EACT

March 2017