The European Commission has today launched the process for organising the settlement of NextGenerationEU and other EU bonds through the payment and settlement infrastructure of the Eurosystem (the European Central Bank and the national central banks of the euro area). In following this route, EU bond issuance will be aligned with the arrangements used by EU sovereign issuers and the European Stability Mechanism (ESM) whose bonds transactions are settled in central bank money.
Following a selection process, 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 a settlement agent for all EU debt securities once the EU issuance service is in place.
The EU Issuance Service will create a level playing field for all Central Securities Depositories and investors that trade EU issued bonds. With the EU Issuance Service, the European Commission will equip itself with a settlement process reflecting its new role as one of the largest issuers of euro-denominated debt.
To mark the launch of the cooperation between the European Commission, the European Central Bank and the National Bank of Belgium, Commissioner Johannes Hahn in charge of Budget and Administration, together with ECB Executive Board Member Fabio Panetta and the Governor of the National Bank of Belgium Pierre Wunsch met today. They agreed on the implementation of this project, which will become operational in the second half of 2023.
On this occasion, Commissioner Hahn said: “The EU Issuance Service presents several advantages for the Commission as an issuer but also for all investors in EU securities. Once implemented, this project will ensure that our bond settlement benefits from the involvement of the Eurosystem. They can be used more easily for collateral with the Eurosystem and will be accessible to all investors on an equal basis.”
While the European Commission has a long-standing presence on capital markets, it launched two large-scale borrowing programmes (SURE and NextGenerationEU) in 2020 and in 2021, respectively, in response to the coronavirus pandemic and its consequences. On that basis and since October 2020, the Commission has issued €212.8 billion in long-term borrowing under the two programmes. Over half of this amount was issued under the Commission’s diversified funding strategy, which enables flexible borrowing under the best possible market conditions. With these programmes, of up to €100 billion and up to €800 billion respectively, the Commission is set to become one of the largest issuers in euro.
This has called for a new approach also on the settlement side, and further information will become available as work on the project progresses.
Background
The European Commission is empowered by the EU Treaties to borrow from the international capital markets on behalf of the European Union. It is a well-established name in debt securities markets, with a strong track record of successful bond issuances over the past 40 years. These bond transactions are denominated exclusively in euro.
The European Commission’s largest programme is the NextGenerationEU recovery instrument of up to around €800 billion in current prices. About 30% of the funds for this programme will be raised through the issuance of NextGenerationEU green bonds.
The Commission also runs other programmes, under which it issues bonds to finance loans to EU and third countries. These include the up to €100 billion SURE programme to support jobs and keep people in work, financed exclusively through social bonds. Under its macro-financial assistance (MFA) programme, the Commission has issued €1.2 billion to support Ukraine in the first half of the year. A new MFA loan for Ukraine of €1 billion, the first tranche of an up to €9 billion programme, was proposed earlier in July.
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 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.
*Source: European Commission
By: N. Peter Kramer
