News Release
Practical Issues Arising from the Introduction of the Euro
10 December 1997
London will be ready
London’s financial markets need to be well prepared for the introduction of the euro. They will be. The full range of euro financial instruments will be tradable here, the associated payments may be made, and trades in euro securities may be settled, even though the UK will initially be ‘out’.
The Bank’s sixth Practical Issues publication, issued today, explains the current state-of-play in the preparations. Five main areas are covered.
Wholesale payments
First, payments. There will be a range of alternative ways of making wholesale euro payments in the UK. One will be through CHAPS euro, a real-time gross settlement (RTGS) system which is being developed in the UK to run in parallel with the current CHAPS sterling RTGS system. It will allow euro payments to be settled between banks within the UK and also between banks in the UK and elsewhere in the EU, through its link to TARGET (the pan- EU wide interlinking of RTGS systems).
Practical Issues explains why CHAPS euro will be an attractive system (page 15); it also explains how intraday credit, necessary to oil the wheels of the payments system, may be provided in CHAPS euro if it is not made available by the European Central Bank (pages 18-19); and the Bank’s desire that TARGET become the euro payments medium of choice throughout the EU for banks’ high-value payments (page 16-18).
The ‘Conversion Weekend’
Second, London market practitioners have been doing a great deal, notwithstanding the UK opt-out, to assist the practical implementation of financial markets in euro, including within the euro area itself. They have already promoted the need for, and secured, continuity of contracts under the law following the introduction of the euro; the desirability of harmonised market conventions for the issue and trading of euro financial instruments across the euro markets as a whole; and now they are focusing on the so-called ‘conversion weekend’, which spans the end of 1998 and the start of 1999. Many trades, and outstanding positions, which are denominated in participating currencies ahead of the weekend, will be transformed into euro units after this weekend.
Practical Issues (Chapter 4, pages 43-57) explains the processes which will be involved, in custodians, sub- custodians, market firms and the central securities depositories. Meticulous planning, and prior testing and trialling, is critical to the smooth introduction of the euro: otherwise there will be potential for fraud, and the scope for confusion and error. The ‘conversion weekend’ will be like a simultaneous ‘Big Bang’ at the wholesale level throughout the EU; and it is essential that the euro gets off to a good start.
Financial market preparations
Third, Practical Issues reports (Chapter 3) the developing preparations in financial markets. It notes the recommendation that, in the foreign exchange market, the basis for quoting sterling against the euro should be the same (1 euro = £x) as the agreed harmonised convention for the euro against other currencies. In addition, in London, the BBA has explained in detail its plans to publish euro LIBOR; and that it will continue to publish during the transition period the individual ‘in’ currency LIBORs at the same rate as euro LIBOR. In other centres, however, similar information is not yet available, nor are full details of the proposed euro area-wide reference rate (EURIBOR). This information is urgently required.
Market practitioners also need to know urgently precisely when and how participating governments intend to redenominate their outstanding national currency debt into euro.
Preparations by financial institutions
Fourth, beyond the preparation of the wholesale financial infrastructure, the Bank is monitoring many individual financial institutions’ own preparations in the UK. Practical Issues (Chapter 5) notes that thorough and substantive preparations are in hand amongst banks and securities houses, although preparations amongst many fund managers and insurance companies appear to date rather less well advanced.
The Chancellor’s initiatives for UK businesses
Fifth, Practical Issues reports (Chapter 6) the initiatives by Government to begin preparing UK businesses for the euro. The Chancellor has established a number of Committees and Working Groups, whose work is expected to be published in the New Year.
The Bank will produce another Practical Issues in the early spring.
Anyone who wishes to know more about the City’s preparations for the euro, or to make suggestions, should contact John Townend, Deputy Director, Bank of England (fax no: +44(0)20 7601 5637).
Notes to Editors
For two years now, since the Madrid Summit decided the way in which the single currency would be introduced, in stages, to replace the participating national currencies, the Bank has been helping the City to prepare. The preparations are being carried out predominantly in the private sector; but the Bank is assisting by co- ordinating them where necessary, by communicating widely their progress, and by addressing concerns as they arise.
As part of its communication effort, the Bank has been producing a broadly quarterly series of Practical Issues since the spring of 1996. This is the sixth edition. 40,000 copies are now distributed across the City and beyond, including some 5,000 which go directly overseas.
Key Resources
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Practical Implications for the UK of the Introduction
of the Euro, Sixth Edition, 10 December 1997 Read |
