A single CP market in Europe, reality or wishful thinking?

There are two major questions, EU Commission would like to address in light of its CMU or the new SIU project. The 2 questions are: what are the reasons for a highly fragmented Commercial Paper (CP) market in Europe (i.e. EU) compared to the USA, and how to standardize and boost these markets to move towards a single market? There are several reasons, and we think regulations cannot solve the problem alone…Why change a winning team (even if the market doesn't belong to the EU) remains the question to be addressed, along with that of how to repatriate the ECP market to the continent.

Fragmented versus unified market

There are obviously many reasons for this fragmentation (e.g. technical, legal, rating, back-up facilities, historical habits, documentation, depth, ease of selling a name, etc.). The idea is not to solve all these points and aspects, but to make these markets, perceived as hyper-domestic, look more international than national. At this stage, no market has really succeeded in imposing its cross-border/ model on foreigners. These markets are essentially marked by domesticity. It is fair to say that the European Commercial Paper (CP) market is significantly more fragmented than its U.S. counterpart due to structural, regulatory, and market-related factors. Below is a detailed breakdown of the reasons for fragmentation and potential solutions and ideas (to be contemplated further) to standardize and boost the market towards a more unified structure.

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1. Reasons for a Highly Fragmented CP Market in Europe vs. USA

A. Regulatory and Legal Fragmentation

Different Legal Frameworks: Unlike the U.S., where CP is issued under a uniform federal framework (exempt from SEC registration if under 270 days), the EU has no single regulatory standard. Each country has its own rules, making cross-border issuance complex.

Lack of Harmonized Issuance Rules: Some countries require specific approval for CP programs, making issuance slower and costlier.

Varying Tax Treatments: Different withholding tax policies across EU countries discourage cross-border investment in CP.

These local/domestic markets are considered as more flexible, more open to national or local risks. We should not underestimate the weight of historical practices and habits in finance. Regulation may help solve the problem and may help create a European CP market. Nevertheless, it is only one required element to achieve such an ambitious goal.

B. Market Structure Differences

Multiple Currencies: The U.S. CP market is denominated almost entirely in USD, whereas in Europe, CP is issued in EUR, GBP, CHF, and other local currencies, reducing liquidity.

Different Investor Bases: In the U.S., CP is primarily held by large money market funds (MMFs), while in Europe, investors are more fragmented across banks, corporates, and insurers.

Lack of Centralized Trading Platforms: The U.S. market benefits from a few dominant electronic trading platforms, whereas Europe has multiple trading venues with varying standards.

C. Limited Secondary Market Liquidity

CP in Europe is Largely Buy-and-Hold: European investors tend to hold Commercial Paper until maturity rather than actively trading it, reducing secondary market depth. Bank Intermediation vs. Direct Issuance: In Europe, many CP transactions rely on banks as intermediaries, whereas in the U.S., large issuers can directly access investors via dealer networks. Here again, it is a question of liquidity.

2. How to Standardize and Boost the European CP Market?

A. Regulatory Harmonization

Adopt an EU-Wide CP Framework: The EU could introduce a standardized CP issuance framework, like the U.S. Rule 2a-7 for money market funds, to reduce legal and regulatory discrepancies. Tax Harmonization for CP Investments: Eliminating or aligning withholding tax treatments across EU countries would encourage more cross-border investment. MMF’s must stay unchanged to remain an investor in ST paper.

B. Market Infrastructure Improvements

Develop a Pan-European Trading Platform: Establishing a centralized CP trading platform would improve liquidity, price transparency, and market efficiency. Enhance ISIN and Settlement Standardization: Streamlining settlement processes (e.g., using TARGET2-Securities) would reduce inefficiencies in cross-border CP transactions. The creation of ISIN codes should also be faster and easier.

C. Deepening the Investor Base

Encourage Institutional Investment: Expanding the role of European money market funds (MMFs) through regulation (e.g., more favorable capital treatment under Basel rules) would increase CP demand. Promote Greater Use of CP by Corporates: Educating companies on CP as an alternative to bank loans could stimulate issuance. The pension funds, insurance companies, etc.… should be incentivized to invest more in CP.

D. Currency and Liquidity Enhancements

Increase EUR-Denominated CP Usage: Encouraging issuers to use EUR instead of local currencies would enhance market liquidity. Central Bank Support: The European Central Bank (ECB) could play a greater role in CP markets by acting as a buyer during crises, like the Federal Reserve’s Commercial Paper Funding Facility (CPFF).

Conclusion

The European CP market can move towards a more unified structure by regulatory harmonization, infrastructure improvements, and deepening investor participation. A pan-European approach, like the U.S. framework, would reduce fragmentation, increase liquidity, and make CP a more attractive financing tool for companies and investors. Nevertheless, we know that it won’t be an easy project as there are no magic recipes. The weight of culture, habits, history and strong UK ecosystem explain part of these difficulties.

This new unified market planned by the EU must be attractive for Mid-Cap’s and SME’s too and “accessible”.? It should propose depth and be very liquid to be successful. We also need to consider what investors expect and why (if so) they do not invest in these local/domestic CP programs. As you can see, the project is commendable, but so ambitious and complex that we'll have to double our efforts to achieve the goal of a single CP market. It's a safe bet that many of us may be retired by the time this market emerges.

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Fran?ois Masquelier, CEO of Simply Treasury – March 2025