NextGenerationEU: European Commission to transfer its bond issuance settlement to a Eurosystem-based infrastructure
What is the EU issuance service?
The EU issuance service is a project via which the settlement of all bonds issued by the European Commission on behalf of the EU will be processed through the payment and settlement infrastructure of the Eurosystem (the European Central Bank and the national central banks of the euro area).
Once the EU issuance service is in place, a Eurosystem Central Bank – the National Bank of Belgium - will serve as issuer Central Securities Depository and act as an agent for settlement services, and the European Central Bank will act as paying agent for all EU debt securities.
In this way, the bonds issued by the European Commission will be aligned with the arrangements used by large EU sovereign issuers and the European Stability Mechanism (ESM) whose bonds transactions are settled in central bank money.
What is the added value of the EU issuance service?
The setting up of an EU issuance service is a natural step in the development of the EU as an issuer. It will deliver a number of benefits for all market participants, and in particular the investors in EU bonds.
In particular, the EU issuance service will enable EU debt securities issued by the Commission to be settled in the Target2-Securities settlement infrastructure, facilitate their use as collateral by counterparties with central banks. It will create a level playing field for all Central Securities Depositories and investors that trade EU-issued bonds. It will deliver neutrality in the distribution of EU debt and support integration by consolidating liquidity movements and pools associated with it into the central bank money (CeBM) Target Services liquidity pool. With the EU issuance service, the European Commission will equip itself with a settlement process reflecting its role as one of the largest issuers of euro-denominated securities.
What system has the Commission used so far?
The European Commission currently uses a settlement system comprising commercial suppliers of settlement services. These systems have performed proficiently, and the European Commission highly appreciates the quality of services provided by the suppliers. However, the large increase in the scale of EU issuance following the launch of the up to around €800 billion NextGenerationEU issuance programme has led the European Commission to undertake a comprehensive review of all aspects of its bond issuance including its bond settlement. This review has identified the further benefits of transitioning from the current arrangements to a Eurosystem-based settlement infrastructure.
How has the Commission selected the providers it will work with?
For the EU issuance service, the Commission has decided to work with the European Central Bank, which will serve as a paying agent, and the National Bank of Belgium, which will act as Central Securities Depository and settlement agent for all EU-issued debt securities once the new structure is in place.
The decision was taken following a selection process among the national central banks which could provide the required services to the Commission. In addition to the ability to meet all requirements, the Commission also took into account the best possible price and the ability to deliver within the necessary implementation deadlines.
When will the project be launched?
Work on operationalisation of the EU issuance service is starting now, with the perspective of launching the process in the in the second half of 2023.
What is a bond settlement and how does it work?
Securities settlement is the operation through which the ownership of securities is formally transferred from the seller to the buyer. It usually lasts for a few days, and during that period both the buyer and the seller have to fulfill their obligations to complete the transaction. During the settlement period, the buyer must pay for the securities, and the seller must deliver the securities. Once this exchange has been completed, the buyer becomes the legal owner of the securities.
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