Money Market
Commercial Paper: A Primer
February 12, 2025
In the previous articles, we have already studied about regular commercial paper as well as asset-backed commercial paper. However, there is one more type of commercial paper that is commonly used by investors. This type of commercial paper is called the Euro commercial paper. This commercial paper is issued in large volumes by many issuers across the world.
In this article, we will have a closer look at what the Euro commercial paper market is and what are its defining features.
What is the Euro Commercial Paper Market?
Euro commercial paper is generally used to refer to a commercial paper that was issued in a different currency as compared to the home currency of the issuer.
For instance, if a borrower in the United States accesses the European market to issue commercial paper denominated in Euros, then this transaction is said to be related to the Euro commercial paper market.
Some of the characteristics which are commonly associated with the Euro commercial market have been written below:
- Investor Base: The most important difference between the regular commercial paper market and the Euro commercial paper market is the type of participants. Euro commercial paper market is more popular amongst central banks and other financial institutions. Since they want to buy assets in a wide variety of currencies to maintain adequate reserves, they often use the euro commercial paper market to meet their short-term investing needs.
The next category of participants is blue-chip multinational corporations that hold money in various currencies. Money market funds and other traditional investors form a smaller portion of the euro commercial market.
- Credit Quality: The credit quality of the assets issued in the euro commercial market tends to be slightly lower. This is because the issuing company does not hold many reserves in the currency in which the paper is denominated. Hence, the country could end up in trouble if the value of the currency fluctuates significantly.
Also, since investing in euro commercial paper could also mean investing in many developing countries, the credit quality ends up being lowered because of the lax rules and regulations.
- Interest Rate: Investors who invest in euro commercial paper generally get a higher interest rate as compared to those who invest in regular commercial paper. This is because these investors are undertaking significant risk.
Currency risks, as well as counterparty risks, are just two types of risks that have been mentioned. There are several more that investors face. This is the reason that they need to be compensated fairly.
- Foreign Exchange Hedge: A lot of issuers issue euro commercial paper since this reduces the need to hedge. For instance, Apple, an American corporation has business interests in China. As a result, they need short-term working capital in China as well.
Now, instead of issuing commercial paper in the United States and then sending the proceeds to China, they can simply issue the commercial paper in China itself. The reason is that by issuing in one country and using the money in another country, the issuer bears unnecessary currency exchange rate risks. This risk can be completely eliminated by using euro commercial paper.
- Maturity: It has been observed that Euro commercial paper has a higher maturity as compared to regular commercial paper.
Regular commercial paper generally has a maturity of fewer than 60 days whereas euro commercial paper has a maturity of anywhere between 60 to 180 days on average. The reason behind this higher maturity is not exactly known. However, there is a general trend towards issuing papers with higher maturity in the Euro market.
- Settlement: The trading and settlement of Euro commercial paper take more time as compared to regular commercial paper. On average, it takes anywhere between two to three days to settle a Euro commercial paper transaction after the trade is over. At the same time, most regular commercial paper transactions are settled before the end of the same day.
From the above article, it is evident that the euro commercial paper market is quite different from the regular commercial paper market. Hence, investors need to be aware of the differences between these markets before they choose a specific one to make their investment.