News Release
Practical Issues Arising from the Introduction of the Euro
11 June 1998
A new, eighth, edition of Practical Issues is being published
today. Practical Issues is the only one of its kind in Europe.
It is widely regarded by market practitioners and officials
across Europe as an authoritative account of the latest state-of-play
in the practical preparations for the euro.
John Townend, who is in charge of the Bank’s work in helping the City of London to prepare for the introduction of the euro, said today: "Practical Issues is essential reading for all those involved in the wholesale markets. Market firms which are not fully prepared could find themselves at a significant competitive disadvantage at the start of next year." Key points in this new edition are as follows.
Testing for the conversion weekend
Given the amount of work to be completed over the conversion weekend (between 31 December 1998 and 4 January 1999), it is essential that all market firms understand what they have to do, by when. Prior testing and trialling of the necessary system changes is critical. The market believes that it would help to test using data for a common date, like 31 August.
Practical Issues says (page 31) that a full market dress rehearsal of the conversion weekend for those markets affected by the redenomination and any reconventioning of ‘in’ government and any corporate debt would be impracticable. But bilateral testing should be arranged at a time mutually convenient for market participants. Even though 31 August is a Bank Holiday in the UK, it would be helpful if all firms prepared to store their data for this date, for subsequent use in testing.
The euro markets after the conversion weekend
It may take time for the national markets in the first-wave Member States to become fully integrated, even though they will share a common currency. But as soon as the conversion weekend is over, there will be active markets in euro in London linked to the euro markets elsewhere. The new edition sets out the consensus amongst practitioners on a wide range of practical issues in the euro wholesale markets in money, foreign exchange, bonds and equities.
Practical Issues says (page 40): "The concentration of foreign exchange, international bond, swap and derivatives trading involving the euro will encourage the development of deep and liquid wholesale euro money markets in London." So many bank loans, FRNs, swaps and other derivatives will be priced on the basis of euro LIBOR, the measure of the cost of euro funds in the London market.
Euro payments in London
In view of the scale of activity expected to take place in euro in UK financial markets, the UK euro wholesale payment system (CHAPS euro) will have an important role to play. It will provide UK access to TARGET. But it will also act as a stand-alone payment system in London. CHAPS euro is based on the same concept as the present CHAPS sterling service, which is widely understood and appreciated. The CHAPS euro service will be at least as good.
Practical Issues explains that the CHAPS Company is drawing attention to the attractive features of its euro system. It will be riskless, resilient and robust. It will have broad geographic coverage and easy access via S.W.I.F.T. It will be fast and efficient. "Once a sending bank releases a payment, the average time taken for it to reach a receiving bank is less than one minute, which compares favourably with any other European payment system." CHAPS euro will use the minimum liquidity necessary. It will be ‘open all hours’. It will be competitive in price. It will be fully tested, giving absolute confidence in CHAPS euro’s reliability. And it will be operational by end-1998.
Standard settlement instructions and nostro accounts
At present banks generally maintain at least one (nostro) account in each ‘in’ country in order to make payments in the local currency via the local payment system. One of the most important issues outstanding for market participants is the consolidation of such accounts in the participating national currencies into one (or more) euro account(s). Guidelines are proposed in the new edition of Practical Issues, including for changes to standard settlement instructions. The key is adequate preparation and planning to minimise potential problems.
Practical Issues says (page 45): "There are risks involved if all firms attempt to consolidate their payment arrangements and change SSIs over the conversion weekend or shortly afterwards, notwithstanding the most careful preparation and planning. The result could be a great number of misdirected payments, with consequences for liquidity management and the associated extent of interest claims." Most firms intend to delay changes to SSIs for outstanding national currency transactions until after three to six months of 1999, when the bulk of these transactions will have matured and volumes of transactions requiring changes will therefore be lower, but some major firms plan to consolidate straightaway.
Information still needed by the market
Practical Issues says that the remaining gaps in the information available to the market must be filled quickly, if the euro markets are to function efficiently across the European Union as soon as the conversion weekend is over. Information is still needed about: whether national payment systems and exchanges in the euro area will be open on all TARGET opening days; how precisely information providers will display replacements for disappearing price sources; which individual securities will be redenominated; and what the precise timing will be of changes to day-count conventions for interest accrual.
Other issues covered in this edition
The new edition of Practical Issues also contains technical input for market participants in a number of other areas:
-
the services which the major information providers will supply (pages 68-75);
-
fund management, including benchmark indices and the treatment of historic price data, and insurance (pages 76-88);
-
the regulatory approach which the Financial Services Authority proposes to take (pages 99-101);
-
a detailed and up-to-date account of issues relating to conversion, rounding and ‘triangulation’ (pages 101-107); and
-
further information on the proposed implementation of the ECB’s monetary policy (pages 109-111).
Notes to Editors
The Bank has been helping the City to prepare for nearly three years. As part of its effort, the Bank has been producing a quarterly series of Practical Issues since early-1996. This is the eighth edition. Over 40,000 copies are now distributed across the City and beyond, including some 5,000 which go directly overseas. They are also available on the Internet. The Bank will produce another edition in the autumn.
