EECS 1541 Lecture Notes - Lecture 34: Japanese Yen, Euroclear
24 Jun 2018
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EECS 1541 Lecture 34 Notes
Introduction
Underwriting Process
Some firms have begun to issue debt denominated in Japanese yen in order to take
advantage of Japan’s extremely low interest rates.
Because credit conditions and the interest rates for each currency change constantly,
the popularity of particular currencies in the Eurobond market changes over time.
Eurobonds are underwritten by a multinational syndicate of investment banks and are
simultaneously placed in many countries, providing a wide spectrum of fund sources to
tap.
The underwriting process takes place in a sequence of steps.
The multinational managing syndicate sells the bonds to a large underwriting crew.
In many cases, a special distribution to regional underwriters is allocated before the
bonds finally reach the bond purchasers.
One problem with the distribution method is that the second- and third-stage
underwriters do not always follow up on their promise to sell the bonds.
The managing syndicate is then forced to redistribute the unsold bonds or to sell them
directly, which creates digestion problems in the market and adds to the distribution
cost.
To avoid such problems, bonds are often distributed in higher volume to underwriters
that have fulfilled their commitments in the past at the expense of those that have not.
This practice has helped the Eurobond market maintain its desirability as a bond
placement center.
Secondary Market Eurobonds also have a secondary market.
The market makers are in many cases the same underwriters who sell the primary
issues.
A technological advance known as Euro-clear helps to inform all traders about
outstanding issues for sale, thus allowing a more active secondary market.
