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Practical Issues Arising from the Introduction of the Euro Practical Issues Arising from the Introduction of the Euro 74 business days to go before January 1999 Issue No 9 17 September 1998 Practical Issues Arising from the Introduction of the Euro PRACTICAL ISSUES ARISING FROM THE ISSUE NO 9 INTRODUCTION OF THE EURO 17 SEPTEMBER 1998 CHAPTER 1 INTRODUCTION 5 CHAPTER 2 MARKET GUIDANCE ON THE CHANGEOVER TO THE 8 EURO IN WHOLESALE FINANCIAL MARKETS CHAPTER 3 OPERATIONAL FRAMEWORK OF THE ESCB 51 CHAPTER 4 PAYMENTS AND OTHER FINANCIAL INFRASTRUCTURE 57 CHAPTER 5 FINANCIAL INSTITUTIONS’ PREPARATIONS 74 CHAPTER 6 EURO MARKET SERVICES IN LONDON 83 CHAPTER 7 BUSINESS, RETAIL AND PUBLIC SECTOR PREPARATIONS 97 CHAPTER 8 OVERARCHING ISSUES 103 INTERNET ADDRESSES FOR INFORMATION ON THE EURO 118 (Practical Issues addressed in previous issues, together with abbreviations and acronyms and organisations involved, are available on the Bank’s website) Cartoons by Basil Hone CHAPTER 1: INTRODUCTION 1 This edition of Practical Issues is divided into two complementary parts. The first part consists of market guidance for traders and for back-office staff on the changeover to the euro in wholesale financial markets (Chapter 2). This Chapter brings together, in summary, all the available general information that we believe market firms and their counterparties in the wholesale markets need to know before, during and after the conversion weekend about the changeover in prospect. Not all the relevant information is yet available. Where decisions have not yet been taken, the issues outstanding are identified. 2 The second part (Chapters 3-8) consists of an update in the following areas: ● The operational framework of the ESCB. Chapter 3 sets out the main decisions taken by the Governing Council of the ECB since it was established in June, and describes briefly the operational framework for monetary policy in the euro area. ● Payments and other financial infrastructure. Chapter 4 reviews recent progress in the preparations in London and elsewhere to facilitate wholesale euro payments and securities settlement from the beginning of next year, including decisions by the ECB on TARGET pricing and on ‘out’ countries’ access to intraday liquidity. ● Financial institutions’ preparations. Chapter 5 summarises the results of a series of meetings which the Bank has held this summer with a sample of major financial institutions in London to confirm that they are on schedule in preparing for the introduction of the euro, and to identify the technical issues which they consider still need to be addressed. ● Euro market services in London. Chapter 6 focuses on the euro products and services that market firms will provide in wholesale financial markets in London from the beginning of next year in order to meet the changes in the marketplace that the euro will bring. ● Business, retail and public sector preparations. Chapter 7 summarises recent developments beyond the financial markets in the preparations for UK ‘out’, and for possible UK entry later. ● Overarching issues. Chapter 8 contains an update on legal, accounting, tax and regulatory issues. 3 We will be holding a third euro symposium in the Bank in October (by invitation only, because of space constraints). This will be followed by a further series of roadshows in financial centres overseas to explain the impact of the euro on London’s financial markets. 4 Copies of Practical Issues may be obtained from the Bank’s Public Enquiries Group (tel no: 0171 601 4012; fax no: 0171 601 5460) and are available on the Bank’s website. Comments are also welcome, and should be addressed to John Townend, Deputy Director, Bank of England, Threadneedle Street, London EC2R 8AH (fax: 0171 601 5637). We plan to publish the tenth edition in this series in December. 5 LONDON AS AN INTERNATIONAL FINANCIAL CENTRE NUMBER OF FOREIGN BANKING INSTITUTIONS (1995) MARKET SHARE OF TOTAL INTERNATIONAL BANK LENDING No. of banks 25 % 600 20 % 500 15 % 400 300 10 % 200 5 % 100 0 % Q1 Q2 Q3 Q4 Q1 1997 1998 France Germany United Kingdom 0 London Paris Frankfurt NewYork Tokyo Japan United States Source: Bank of England Source: Bank for International Settlements MARKET SHARE OF GLOBAL FOREIGN EXCHANGE TURNOVER (1995) US 16% Japan 10% UK Germany 30% 5% France 4% Singapore 7% Switzerland 5% Hong Kong 6% Other Other European 5% 12% Source: Bank for International Settlements, triennial survey OTC DERIVATIVES: TOTAL CONTRACT TURNOVER (1995) DERIVATIVE CONTRACT TURNOVER ON SELECTED EXCHANGES (1997 TO MID-1998) 80 Number of contracts(mn) 30 70 25 60 20 50 15 40 10 30 20 5 10 0 1997 1998 March June September December March June 0 LIFFE CBOT MATIF DTB UK US Japan Germany France TOKYO INTL FINANCIAL FUTURES Source: Bank for International Settlements (April 1995) Net turnover (daily averages) Source: Futures Industry Association 6 MARKET SHARE OF FOREIGN EQUITY TURNOVER ON MARKET CAPITALISATION ON SELECTED STOCK EXCHANGES SELECTED EXCHANGES (END-1997) (END-1997) Domestic equity (ECUmn) LSE 2,000,000 60% 1,800,000 1,600,000 1,400,000 NYSE 25% 1,200,000 1,000,000 800,000 600,000 400,000 Federation of German Exchanges 200,000 Paris 3% 1% 0 Swiss Exchanges 2% AMSTERDAM FRANKFURT LONDON PARIS SWISS Source: London Stock Exchange Source: Federation of European Stock Exchanges HOLDINGS OF INSTITUTIONAL EQUITIES IN TOP FIVE EUROPEAN CITIES (1997) FRANKFURT $252bn PARIS $338bn ZURICH $579bn LONDON $1,807bn Source: Technimetrics International Target Cities Report 1998 LONDON'S SHARE OF INTERNATIONAL BOND MARKET MARKET SHARE OF MARINE AND AVIATION INSURANCE (1994) 100 % % 50 90 % 40 80 % 30 70 % 20 60 % 10 0 50 % UK USA Japan France Germany Other 1989 1990 1991 1992 1993 1994 Primary Market Secondary Market Marine Aviation Source: Bank of England Source: Lloyd's of London 7 CHAPTER 2: MARKET GUIDANCE ON THE CHANGEOVER TO THE EURO IN WHOLESALE FINANCIAL MARKETS 1 This Chapter provides market guidance on the changeover to the euro in wholesale financial markets. It is set out in three parts. ● The first part is intended to inform traders in the euro markets from 4 January 1999, but may also be of interest to back-office staff. ● The second part is directed to back-office staff and is divided into three sections: a section on euro payments and settlement, which will remain relevant after the conversion weekend; a section on the conversion weekend itself; and a section on market documentation. ● The third part concerns legal, accounting, tax and regulatory issues, which may be of general interest. A GUIDANCE FOR EURO MARKET TRADERS FROM 4 JANUARY 1999 2 When markets open on 4 January 1999, the national currencies of participating Member States will have been replaced by the euro as their single currency, and the national currency units of that currency will have been irrevocably locked against each other and against the euro unit. The euro will also have replaced the ECU on the basis of one for one. 3 The conversion rate for each participating national currency against the euro will be fixed on 31 December, using the 11.30am CET official ECU fixing. It is intended that these rates will be announced in the early afternoon of 31 December. They will be final and definitive. The Bank of England will publish these euro conversion rates on a new Reuters page at BOE/EURO and on its euro website. A dummy BOE/EURO page is now available. WM/Reuters’ approach to closing ECU and euro rates is set out in Chapter 4. 4 It was announced in May that the rates at which the participating currencies will be irrevocably locked against each other from 1 January 1999 will be based on their ERM central rates. They are set out in Table 1. TABLE 1: ERM BILATERAL CENTRAL RATES TO BE USED IN DETERMINING THE IRREVOCABLE CONVERSION RATES FOR THE EURO DM100= BF/LF100= SP100= FF100= IEP1= ITL1000= DF100= AS100= ESC100= FM100= DM BF/LF 2062.55 SP 8507.22 412.462 FF 335.386 16.2608 3.94237 IEP 40.2676 1.95232 0.473335 12.0063 ITL 99000.2 4799.90 1163.72 29518.3 2458.56 DF 112.674 5.46285 1.32445 33.5953 2.79812 1.13812 AS 703.552 34.1108 8.27006 209.774 17.4719 7.10657 624.415 ESC 10250.5 496.984 120.492 3056.34 254.560 103.541 9097.53 1456.97 FM 304.001 14.7391 3.57345 90.6420 7.54951 3.07071 269.806 43.2094 2.96571 8 5 In the euro markets, all weekdays will be business days except Christmas Day and New Year’s Day when they fall on a weekday. Money and foreign exchange markets 6 New money and foreign exchange transactions and associated derivatives in wholesale markets are expected to be denominated in euro instead of national currency. ● The recommended day-count convention for money market instruments and Treasury bills, both for interest calculation and discounted yield, and for syndicated bank loans and FRNs, is actual/360. ● The standard settlement convention in the money and foreign exchange market will remain ‘spot’ (ie T+2), with interest accrual in the foreign exchange market beginning on the second day after the deal has been struck. Trading in the money and foreign exchange market is also expected to occur for cash (ie T+0) and overnight (ie T+1) settlement. Information providers intend to show euro rates for T+0, T+l and T+2 settlement. 7 Outstanding national currency transactions in money and foreign exchange and associated derivatives will remain in national currency unless and until the parties agree bilaterally to convert to euro. Existing market conventions are expected to be retained for existing instruments. 8 Foreign exchange quotations.
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