Definition
Finnish Commercial Paper
Finnish Commercial Paper or a FI CP is a short-term, unsecured debt instrument issued by corporations, financial institutions, or government entities in Finland.
Companies use FI CPs to fulfill their short-term financing requirements, namely funding working capital needs, tackling cash flow imbalances, or covering other urgent financial obligations.
- Maturity: from 1 to 364 days
- Currencies: EUR, USD, GBP, etc
- Nominal amount: The legal minimum face value of Finnish CP is 100,000€ or the equivalent in the relevant foreign currency determined at the time of issuance.
- Rate: fixed or variable (indexed to EURIBOR for example). The rate is freely negotiated between the issuer and the investor.
Presenting the actors
All of them enjoy market stability, liquidity and competitive financing terms.
Issuers
Companies in Finland turn to Finnish commercial paper to address their short-term financing needs, such as investments and immediate expenses. Issuers within the FI CP market fall into three main categories: financial institutions, corporations, and public entities.
Intermediaries
In the FI CP market, intermediaries play a crucial role in upholding market liquidity, similar to other debt markets. These intermediaries bridge the financing requirements of Finnish CP issuers with the investment preferences of buyers. They facilitate negotiations and manage the features of the issuance process.
Two distinct types of intermediaries operate in the Finnish commercial paper market:
- Dealers, usually banks, serve as primary intermediaries. They might resell the paper directly to investors or retain it for potential resale.
- Brokers facilitate transactions between issuers and investors, enabling brokerage without holding commercial papers themselves.
Investors
The predominant investors in Finnish commercial papers consist of money market funds and institutional investors. Money market funds focus on short-term, low-risk, and highly liquid securities, making Finnish CP an attractive addition to their investment portfolios.
Asset managers often manage these funds on behalf of individual or corporate investors. Institutional investors, such as pension funds, insurance companies, and other large financial institutions, also include FI CPs in their short-term investment strategy due to the alignment between Finnish commercial papers’ short-term nature and the liquidity requirements of these institutions.
Issuing and Paying Agent
The Issuing Paying Agent (IPA) collects transaction details from issuers, dealers, and investors, and manages all cash-related activities for their clients. This includes overseeing FI CP issuances and repayments.
Rating agencies
Rating agencies assess issuer credit risk to aid in rate negotiations. Their evaluations relate to the program. Even if some companies lack a rating, they might still have an established FI CP program.
Guarantors
Guarantors step in to ensure repayment in case of issuer default, especially when an issuer lacks a rating.
Arrangers
Arrangers provide expertise and assistance to issuers, particularly regarding specific program types. They are specialized credit institutions.
Clearers
The settlement of Finnish commercial paper transactions falls under the responsibility of Euroclear Finland and Clearstream.
Regulator
The Finnish CP market is regulated by the Bank of Finland and its subsidiary the Financial Supervisory Authority (FIN-FSA), which acts as Finland’s financial and insurance supervisory authority. Additionally, the Ministry of Finance grants licenses for securities and derivative exchanges, as well as confirms the self-regulatory regulations established by these organized exchanges.
Process of creation of a Finnish CP
1 – Introduction to the market
New issuers in the Finnish Commercial Paper market initiate their involvement by establishing a program. This program can be public and encompass terms of issuance, such as ratings, guarantors, paying agents, and more. A new issuer often partners with an arranger to gain insights into the market and take initial steps. This arranger could be an advisory firm or a market participant, such as an issuing and paying agent or a dealer/broker.
2 – Need Expression and negotiation
An issuer contacts chosen dealers/brokers, indicating the desired borrowing amount and an anticipated rate. Negotiations can be an extended process based on market liquidity, with each characteristic of a FI CP subject to renegotiation.
Once terms are agreed upon, intermediaries either purchase the paper for resale to investors or retain it in their records. Requests and offers might also come from investors or dealers/brokers interested in purchasing CP even if the issuer is not currently offering it.
3- Debt instrument creation
Issuers confirm with their IPA, which then seeks an ISIN code from clearers.
Various confirmations also occur between the back offices of the involved parties (investors, dealers, brokers, etc.).
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