Today I would like to talk about FSC’s recent press release on ‘the current trends in CP market’. I guess some of you have already known what commercial paper (CP) is, while others are lost by what I am talking about.
What is CP? Commercial paper is a short-term accommodation bill issued on the basis of corporate self-credit rating. The demand for CP, compared to other corporate bonds, has been largely increasing. This is because the issuance of CP is a lot easier than other corporate bonds which must be approved by the executive board. Unlike corporate bonds, CP can be issued without such an approval as it is done by the authority of corporate management.
As you can see from table above, the CP maket has been significantly increasing since 2005. There is a particularly remarkable leap from 2011 to2012. There are reasons behind this increasing trend in CP market. Businesses use commercial paper (CP) as a way of short-term funding for the purpose of financing their investment needs. Hence, CP plays a very important role as businesses’ source of funding.
However, despite the convenience of issuing CP and relatively easy accessibility, there are CP related problems recently arising. Those problems are causing financial vulnerabilities under weak economic circumstances. As I mentioned at the beginning, CP is issued on the basis of self-credit rating and this factor contributes to an increasing vulnerability in the economy. However, there has been no adequate measure on regulating CP market.
Responding to the concerns, countermeasures for CP market are implemented by FSC. To enhance transparency in CP market, a stricter credit evaluation is implemented. The details of credit evaluation should be posted, illustrating the present financial status of the CP issuer, the soundness of asset, and so on. Moreover, follow-up reports should be provided. Additional measures are to come out, responding to the trends in CP market. It is also planned that electronic short-term lending system is implemented next year.
I hope all these measures will work effectively. We will see how it works! Please keep your eye on this matter 🙂