COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 02.07.1997 
COM(97) 337 final 
COMMUNICATION FROM THE COMMISSION 
THE IMPACT OF THE INTRODUCTION OF THE EURO ON 
CAPITAL MARKETS 

THE IMPACT OF THE INTRODUCTION OF THE EURO ON 
CAPITAL MARKETS 
Table of contents 
I Introduction and executive summary 
II Overview of the task ahead 
III Recommendations 
IV The report 
1. The bond markets 
redenomination 
market conventions 
2. The equity markets 
general considerations 
market functioning 
3. The derivatives markets 
general considerations 
technical issues 
4. Other market features 
price sources 
.issuing procedures 
ratings 
benchmarks 
repos 
reserve requirements 
regulation, restrictions and taxation 
other issues 
V. Glossary 
VI. Annex : List of experts 
i(\ 
I. Introduction and executive summary 
In order to study the impact of the introduction of the euro on capital markets, the 
Commission constituted a group of experts chaired by Mr. A. Giovannini.This report 
is the result of the work undertaken by this group. 
The Commission considers that the market harmonisation is a matter for the fmanical 
markets. In this context, it warmly welcomes the report of the group. It recommends 
the financial markets to take full account of the report in their preparations for the 
introduction of the euro. 
The report reflects the Commission's understanding of the conclusions of the 
consultative group.1 It is focused on technical and other issues that will have a direct 
impact on the functioning of the capital markets after the introduction of the euro. 
The report sets out recommendations on redenomination of the bond and equities 
markets, and on the market conventions that should be applied to the new euro 
market. 
The report examines the consequences of the introduction of the euro in the bond 
market and the equity market, and in particular the necessary technical preparations. 
These are the issues on which market participants expect clear answers now to be able 
to proceed with the preparations for the introduction of the euro. The report is not a 
complete review of all the issues related to the changeover of capital markets, It is a 
reflection of the current state of knowledge and consensus. Other issues remain to be 
examined, aiming at developing best practices and at reaching consensus at the 
European level wherever it is necessary. 
1. Aims and objectives 
The main objectives of the report are to identify technical solutions which may be 
adopted by markets; and to provide guidance for both public authorities and 
markets. 
The start of stage three of EMU offers the possibility of creating a euro securities 
market as broad, liquid, deep and transparent as possible by defining a set of 
common rules, applied in all participating countries of the euro-area, governing 
various aspects of market operations. In an ideal world, harmonisation might 
occur in one big bang. However, practical and political constraints make such an 
approach problematic. Harmonisation of legal and administrative issues is the 
responsibility of the authorities, but technical issues like market conventions, for 
example day counts, settlement periods and business day conventions, are market 
issues. The market has demonstrated in the past its ability to harmonise 
procedures to improve market efficiency. This paper draws together the current 
views of the market on how harmonised the future euro markets should ideally 
be, and sets out recomendations for the common technical specifications for 
these markets. 
1 The members of the group participated in a personal capacity, rather than as representatives of their 
respective institutions. 
lb 
2. Main conclusions 
Regarding the bond market, the main results on which the report presents 
recommendations are the following: 
Redenomination of existing debt. Although redenomination does not appear to 
be essential for the transition to the euro, it would enhance liquidity and would 
enhance the credibility of the process by demonstrating governments' 
commitment. For a given issuer, investors could for psychological reasons prefer 
to hold securities denominated in the national currency unit rather than in euro 
and this could conceivably lead to differential rates emerging. Whilst this is a 
remote possibility, redenomination would remove this risk. 
Concerning the technique for redenomination, a "bottom-up" approach would be 
the best method. This method starts with each individual holding being converted 
into euro using the fixed conversion rates and rounded to two decimal places (i.e. 
to the nearest cent). The sum of all individual holdings is computed and matched 
against the total held at the central depository. Holdings at the central depositories 
remain unchanged and thus redenomination would not affect the total volume of 
securities issued. The cash flow from coupon payments and the maturity value of 
a bond would be virtually unchanged except for small (not more than 1 cent) 
potential rounding differences. Exchange offers could also be considered since 
they would allow the modification of conventions and the creation of more liquid 
issues. 
Market rules and conventions. Harmonised rules would be desirable. They 
would provide greater transparency, avoidance of disputes (fewer back office 
errors) and greater clarity as to the format of the future market to allow 
preparations to go ahead. Actual/Actual should be recommended for day counts 
for bond markets. On coupon frequency, the choice should be left open given that 
semi -annual coupons have benefits for swaps and a reduced risk exposure, while 
annual coupons are cheaper for issuers. A standard definition for business days is 
recommended (i.e. TARGET business days). Although a common standard would 
be best for settlement dates, it appears technically difficult to move to shorter 
periods than two days. At the same time for financial centres operating on same-
day basis it would be unacceptable to move backwards. Market rules and 
conventions suggested for bond markets are compatible with the ones suggested 
by the EMI for money markets. 
Price sources. Continuity in price sources has to be ensured. Prices calculated on 
a national basis (PIBOR, FIBOR, etc) and on a European basis (EURIBOR) can 
coexist. Euro area-wide published indicator rates or harmonised criteria for 
computation of regional indicators are desirable. A statement from the price 
source sponsors on what prices will be available in Stage 3 is required. 
Issuing procedures. Some informal co-ordination of government debt issuing 
would be beneficial. The development of issuing calendars would be welcome for 
the market but opportunistic issuing should not be precluded. 
Benchmarks. In the absence of a federal issuer, markets will decide which is the 
benchmark issue on the basis of quality, liquidity and the range of derivatives 
products. 
Ratings. It has been argued that membership of the euro-area could result in an 
adjustment for some sovereign credit ratings. This is based on the argument that 
euro denominated debt should be treated as foreign currency debt given the 
transfer of monetary sovereignty to the ECB. However, a number of counter 
arguments have been stated. Membership of EMU will strengthen fiscal policy in 
terms of discipline and credibility, and monetary financing of debt is no longer 
available to Member States. 
Repo market. Market participants consider that overly aggressive use of initial 
margin/haircut in the official repo market should be avoided. On the other hand 
the use of variation margins in financing transactions is important for the 
efficiency of the capital markets. 
Regarding the equity market, the main conclusions are the following: 
exchanges will trade and quote in euro from first January 1999. 
Intermediaries will have to make the necessary conversion in order to 
account to their clients in the currency chosen by the latter; 
coordination and harmonisation of market rules and conventions appears to 
be less important than for other markets; 
redenomination would be a sensible step to take at the same time as the 
change in the accounting unit. It is a company's decision independent from 
stock exchanges decision about trading in euro. It is not essential that 
redenomination happens at the start of Stage 3 as the denomination of share 
capital should neither affect its economic value nor investors' ability to trade 
the shares 
non par value (NPV) shares. This is a solution to be recommended. With 
NPV shares there is no need for physical exchange of share certificates. The 
share prices can be adjusted by simple splitting and there is no need for 
capital adjustment. NPV shares are allowed by the second Community 
Company Law Directive. However, the implementation of the NPV share 
solution would require national legislation to be adopted in most of the 
Member States. 
II. Overview of the task ahead 
The euro securities market will be composed of a group of national markets sharing a 
single currency. Unless the market takes action to define and implement a common 
euro-area wide approach the market in euro will be divided by the current different 
national practices, conventions and standards. Most or perhaps all market participants 
could operate in such an environment (which would be little different from the status 
quo), but a multiplicity of markets in euro each with different national features would 
not be as efficient as a more homogeneous market. 
There is a serious risk thaj the existence of different conventions for similar types of 
euro denominated instruments will result in additional confusion and increased cash 
flow matching problems and reconciliation errors. This might be particularly true for 
the non-sovereign sector. For example, whereas the retention of country specific 
conventions for sovereign debt would be simple to manage, in the case of a large 
corporate that issued bonds in more than one country in the euro area, all denominated 
in euro but subject to different conventions, there could be considerable confusion as 
to which set of conventions should be applied. It would be necessary for a check to be 
made each time there was any doubt as to the appropriate conventions. Whilst such 
checking appears to be simple, perhaps no more than a short telephone call, it would 
be an additional cost, and a potential source of errors. Investors, particularly those 
from countries outside the EU, might also be deterred by the lack of transparency. 
Thus although harmonisation is not a prerequisite for the introduction of the euro, 
there would be advantages in doing it and disadvantages from not doing it. 
During the transition period, contracts drawn up in old national currency 
denominations are likely to be executed on the basis of pre-existing conventions. 
Even once national currency units have ceased to exist certain differences might 
continue: for example, it is unlikely that national holidays will be harmonised, but for 
other technical issues it should be relatively simple to achieve consensus on a 
harmonised approach. To extract the greatest gains from the introduction of the euro 
with the least disruptive adjustments it will be necessary to identify issues that require 
a common technical approach and those which can be left unaltered. 
III. Recommendations 
The group supported the concept of harmonisation of market conventions for the new 
euro markets. The group recommends that issuers and other market participants 
employ the standards proposed in the report. 
Specifically, the group reached consensus on the following recommendations: 
• That sovereign issuers redenominate their tradable debt at the start of stage 3, 
employing a bottom up methodology with rounding to the nearest cent, and whilst 
other methods should not be excluded, the group supported the aim of keeping the 
number of approaches to redenomination as small as possible. 
• That existing conventions are retained for redenominated debt, and for all 
outstanding issues and instruments, and that exchange offers be considered to 
4 
repackage existing issues into larger, more liquid euro issues with round nominal 
bond values. 
That new harmonised market conventions be applied to new euro debt. The method 
for calculating accrued interest should be based on Actual/Actual. The frequency 
of coupons should be left to individual choice. There should be a single definition 
of what is a business day for the euro, specifically any day when TARGET and one 
settlement system are open. 
That price sponsors and subsequently screen providers announce quickly their 
plans regarding publication of existing national rates. 
That the redenomination of equities would be the consequence of the change to the 
euro of a company's accounting unit. Moving to non par value shares would be the 
best way to facilitate the changeover. 
IV. The report 
1. The bond markets 
1.1 Redenomination: its rationale 
The Madrid European Council in December 1995 decided that from the start of 
Stage Three of EMU all new tradable public debt will be issued in euro. It now 
appears that in addition to issuing new debt in euro, many sovereign issuers are 
considering redenominating into euro their outstanding national currency unit 
debt. Governments see clear advantages to redenomination in terms of enhanced 
credibility of their commitment to the EMU process. Moreover redenomination 
is identified as a means of instantly generating euro liquidity in government bond 
markets. Redenomination would also allow the re-opening of existing issues by 
tap issues in euro. Were there to be no redenomination, then any tap stock would 
have to be made in old national currency units. While repo and derivative 
markets could operate with securities remaining temporarily in national 
denominations (up till the end of the transition period) there is a compelling case, 
from the point of view of increasing confidence in a new European capital 
market, for securities to be converted at the beginning of 1999 to create a uniform 
euro market as swiftly as possible. Given the central role of government debt it is 
clearly of paramount importance that if such a conversion is to be successful then 
governments must act quickly and decisively. 
Redenomination is also put forward by some as a means of avoiding any 
fragmentation of liquidity during the transition period from 1 January 1999 to 
withdrawal of national currency units. The hypothesis is that if two bonds issued 
by the same sovereign, with identical terms and conditions are treated by the 
market as different and not fungible simply because one is denominated in euro 
and the other in old national currency units then there would be a reduction in 
liquidity in the market. Such a difference in treatment would have no legal or 
rational basis but would rest on psychological factors, such as the desire by 
certain investors to hold debt denominated in old national currency units. 
The consensus of the group is that the liquidity, transparency and efficiency of the 
government bond market would be enhanced by the immediate quotation and 
settlement of all bonds, both old and new, in euro from the start of Stage Three. 
In addition to the technical arguments in favour of redenomination, the 
commitment of governments to the process and the precedent set for others would 
be reinforced, and their position as potential benchmark issuers would be 
enhanced. Thus although redenomination of government debt is not essential for 
the success of EMU it is highly desirable and should be encouraged, specifically 
for highly traded debt that will mature after the end of the transition period. 
However, the group thinks that the case for redenomination by corporates is far 
less strong, and that it is likely that costs and technical problems would outweigh 
benefits. Corporates are therefore unlikely to redenominate their debt, but may 
commence before the start of Stage Three to employ market solutions such as 
multi-denomination issues (parallel and catamaran bonds). In this paper, 
therefore, the discussion is limited to the possible approaches to redenomination 
that might be attractive to sovereign issuers. 
In principle, the group would prefer that governments rely on a limited number of 
methods of redenomination. It is, however, clear that redenomination has 
competitive implications for issuers, and that their final decisions will be 
influenced by such factors as the relative costs of different redenomination 
methods, and the ability of national and international securities settlement 
systems to handle the change. 
Regardless of the choice of methodology, there is an overriding urgency for a 
decision on redenomination. Market practitioners and settlement providers must 
be provided with sufficient time to undertake all necessary preparations. A late 
decision could jeopardise the smooth functioning of the market. 
1.2 Redenomination: its definition 
The term "redenomination" requires qualification. In the Council Regulation on 
the euro the term "redenomination" means the change of the unit in which the 
amount of outstanding debt is stated from a national currency unit to the euro 
unit. It does not mean the altering of any other term of the debt. The regulation 
does not address changes in the nominal value of a bond (often termed 
renominalisation). In a sense, from the start of Stage Three all bonds will be 
redenominated de facto into euro because there will be only one currency, the 
euro, and all participating national currency units will merely be expressions of it. 
In terms of currency, a bond expressed in participating national currency units 
and one expressed in euro are both euro. At the end of the transition period all 
national currency denominations will be read as references to the euro unit, 
according to the conversion rate (Council Regulation based on 1091(4) article 14). 
In this report the term "redenomination" is used to refer to methods which have 
the intention of simply restating the unit of a debt in euro rather than in national 
currency units, without affecting in a material way the economic value of the 
debt. It is however the case that all forms of redenomination, except perhaps the 
absolute narrowest, entail a small change in economic value as a result of 
rounding. 
The narrowest definition of redenomination is a simple conversion of a value 
expressed in one currency unit to another using a conversion factor. For example 
a bond with a national currency unit value of 2000 could be redenominated as a 
bond with a euro value of euro 312.600129 (2000/6.39795 [conversion factor] = 
312.600129). Holding values to this many decimals might prove technically 
difficult. It is therefore, proposed that the redenominated amount be rounded to 
the nearest cent, thus the original 2000 would become euro 312.60. This kind of 
redenomination will be made possible by the Council Regulation on the euro 
based on Article 109(1)4 of the Treaty (in particular Article 8.4). 
One likely consequence of redenominating debt is that the amount of outstanding 
debt in euro will not be a whole number. Whilst redenominated debt should be 
fungible with new euro issues, its non-round form could present difficulties for 
trading and settlement. Clearly there will be costs for traders and settlement 
providers; however, the international and national clearing systems are prepared 
to meet the requirements of any redenomination process selected by governments, 
and the markets are more than capable of rising to the challenge of trading in non-
round lots. 
In addition to redenomination, it is open to issuers to consider renominalisation 
mechanisms to change the nominal value of their bonds to round euro values. 
The advantage would be a homogeneous pool of euro securities delivering 
enhanced liquidity. Moreover, the trading and settlement inconvenience that 
bonds with non-round nominal values would generate would be avoided. 
However, renominalisation would materially change the economic value of a 
bond and therefore would require the agreement of bondholders, and possibly 
some form of compensatory payment, which could have tax and reinvestment risk 
implications. It might also be necessary to issue new bond certificates or amend 
existing ones. In either case the issuer would have to absorb significant costs, in 
addition to the logistical problems or managing such operation. Another option 
for issuers might be to make exchange offers. To guarantee success, investors 
would require incentives to take up such offers. Thus the advantages to issuers, 
increased liquidity and reduced funding costs, would be balanced against the 
administrative costs, which could be large, and the need to provide investors with 
a financial incentive to take up the offer. 
1.3 Redenomination: the methods 
The method of redenomination should be quick, easy to implement, fair and cost 
effective. To avoid disruption to linked derivative positions it will be important 
to devise the most exact method of redenomination possible. The legal rights of 
bondholders, which cannot be limited or infringed unilaterally by the borrower, 
place cost and practicality constraints on redenomination. Additionally there are 
technical factors, such as the ability of settlement systems to handle transactions 
in cent, which need to be taken into account. Financial institutions perceive 
difficulties and high costs in handling a multiplicity of redenomination 
methodologies. They would prefer the selection of a common approach to 
redenomination, that is transparent and which would cause the fewest secondary 
effects. 
The form of any public debt selected for redenomination, for example, listed 
physical bond, bearer bond or dematerialised security, has no material impact on 
the cost or on the complexity of the redenomination process because there should 
be no need to undertake any physical exchange or alteration of bond certificates. 
Whatever the method used for redenomination, it will be necessary to inform 
bond holders of the change. The decision on whether to redenominate will be 
taken by the issuer. According to Article 8(4) of the Council Regulation, consent 
of the bond holders will not be required. 
There are a number of basic models for redenomination. All methods generate 
the potential for rounding errors. There are four broad levels at which the impact 
of rounding will have to be taken into account: 
• individual portfolios 
• portfolios at financial institution level 
• depositories 
• global volume of securities issued 
In practice, the main difference between the methods set out below is the level at 
which the rounding errors are generated. The methods are: 
1.3.1. redenomination on the basis of individual bonds or holdings - "bottom-up" 
This is the preferred method of the group. 
There are two basic methodologies within the "bottom-up" approach. The 
redenomination can take place at the level of individual bonds or individual 
holdings. In essence, the securities, either individually or by each individual 
customer portfolio and by each financial institution, are converted to euro 
using the fixed conversion factors. After conversion, euro amounts would be 
rounded to two decimal places (i.e. to the nearest cent). The sum of all 
individual bonds or holdings would then be calculated by the financial 
institutions and matched against the total held at the central depository. Any 
differences between the total calculated by the financial institutions and the 
total calculated by the central depository, which should only be a mater of 
relatively small amounts, would have to be accommodated by adjustments in 
financial institutions' trading accounts, adjustments in individual holdings 
(possibly with cash settlement) or adjustment via a correspondent bank. The 
adjustments would ensure that the sum of individual holdings equals the 
converted total at the central depository and that there was no change in the 
global certificate. 
Rounding errors are less if holdings are converted, as the maximum rounding 
error would then be half a cent per holding as opposed to half a cent per 
bond. Redenomination at the level of individual holding moreover preserves 
more accurately the economic value of future coupon payments and the 
maturity value. Redenomination at the level of each individual bond will 
also result in increasingly significant rounding errors being generated the 
smaller the nominal value of an individual bond. On the other hand, the 
redenomination of individual bonds removes the need to know the size of 
individual holdings, which might be difficult to ascertain, particularly in the 
case of bearer bonds, and results in all investors receiving the same euro 
value pro rata regardless of the number of bonds held. 
A benefit of the "bottom-up" method is that there would be no change in the 
value of an issue at the level of the central depository, and thus 
redenomination would not alter the total volume of securities issued. The 
potential for rounding errors is greatly reduced: no more than half a cent per 
bond or per holding. The cash flows from coupon payments and the maturity 
value of a bond would only change, due to rounding, by an extremely small 
amount (not more than 1 cent per rounding). Such small differences should 
be judged not material. However, there is no possibility of avoiding the 
creation of bonds with uneven nominal amounts expressed in euro and cent. 
This could cause difficulties for trading and settlement. There are potential 
solutions. For example, the minimum tradable amount could be fixed at 1 
cent, or a distinction could be made between sell orders (min. 1 cent) and buy 
orders (min. 100 euro) to gradually eradicate uneven amounts, allowing the 
trading of uneven amounts only off-exchange. The simplest and most 
elegant solution is to trade and settle in cent, but this would reduce the 
maximum value that could be held in a data field by two decimal places. 
1.3.2. redenomination on the basis of fixed minimum denomination with cash 
compensatory payments - "top-down " 
In "top-down" redenomination a bond issue is converted on the basis of the 
minimum denomination fixed in terms of individual bonds. The original 
issue is broken down into a number of "pieces" with identical minimum 
denominations. The issue is then redenominated into euro at the level of 
these "pieces" using the conversion factors and rounded to the nearest cent. 
The new total amount of the issue is then calculated by multiplying the euro 
minimum denomination in euro by the number of pieces. This new total is 
likely to be different, because of rounding differences, from a simple 
conversion of the original national currency total into euro. The difference 
would have to be accounted for through compensatory payments (for 
example cash) to avoid the possibility of artificially generating or destroying 
stock. 
One advantage of the "top-down" method is that, by use of a cash 
compensatory payment and an adjustment of the total number of individual 
bonds, it is possible to create new bonds with round nominal values in euro. 
However, the payment of cash compensation would expose either the issuer 
or investor to reinvestment risk. Moreover, there is a possibility that tax 
could .be charged on the cash compensation for both the issuer and the 
investor. Arguably, however, the levels of risk and tax could be negligible. 
A further undesirable consequence of the essential compensatory payment in 
a "top-down" redenomination is a small but not insignificant change in the 
cash flow generated by coupon payments and in the maturity value of the 
bond. These changes whilst relatively small could be potentially disruptive 
for derivative markets. Hedges set up prior to redenomination might 
therefore be affected. 
1.3.3. redenomination on the basis of fixed minimum denomination without cash 
compensatory payments - "top-down " 
As in the previous method, the original issue is broken down into "pieces" 
with fixed nominal values and redenominated in euro by means of the 
conversion factor and rounded to the nearest cent. The new total for the issue 
is calculated in the same way, but no compensation takes place. 
The most important disadvantage is that rounding errors are accumulated on 
each conversion of a bond. As a result the value of the customer portfolios 
could change considerably. The same holds true for the total value of the 
issue. Were investors to view the conversion as interference in the legal 
position, they might take legal action. Moreover, without compensatory 
payments the new euro-denominated bonds are likely to have uneven euro 
nominal values and thus would present complications for trading and 
settlement. 
1.3.4. redenomination on the basis of the nearest round euro nominal amount -
"arbitrary conversion method" 
The strength of this method is the maintenance of the economic value of cash 
flows and redemption values coupled with round nominal value euro bonds. 
To achieve this the nominal value of a bond is changed to the nearest round 
euro amount. No cash compensation is paid, but the coupon rate and 
redemption price are adjusted to compensate for the change in the nominal 
value, thus preserving all cash flows. There should therefore be no disruption 
to derivative products. 
However, on the down side, there would be a discontinuity between the old 
price and the redenominated one, and repayment at a premium might cause 
difficulties for some yield calculation systems and some confusion if similar 
bonds were td trade at par. Moreover there is a question as to whether the 
change of the nominal value of the bond to the nearest round euro 
contravenes the requirement that the full conversion factor is used in 
conversions from national currency units to euro. 
1.3.5. redenomination on the basis of odd lots - "odd lots top-down " 
This is a variant of "top down" which avoids any need for compensatory 
cash payments. It converts the bulk of an issue into euro bonds with even 
nominal values. As in other versions of "top-down", the original issue is 
broken down into "pieces" and redenominated into euro. However two sets 
of nominal values of the pieces are created. The nominal value of one set is 
so selected that upon conversion the bonds redenominate into round-figure 
euro amounts. The other set, which represents the remainder which could not 
10 
be converted into whole euro, converts into bonds with odd-figure euro 
amounts. 
The advantage of this approach is that the bulk of an issue would convert into 
round euro amounts and hence would facilitate trading and liquidity, 
requiring no changes to trading or settlement systems, while at the same time 
not requiring any compensatory payments. However, the cost of the process 
would be carried by those managing the odd amount bonds. These bonds 
would presumably be more expensive to trade and much less liquid. One 
solution might be to repackage the odd lot bonds. 
^Bottom-up* 
A» issue consisting of tea bonds «acfc with a. nominal value in national currency 
uaifc <w* of NO ijm *$ $pm i» &m watm *•«&* "** *#* ****& 0*& 
2,000), holding *B* «tree bands (ND 5,000) and folding *ÇT five botids (Î<ÈD 
5,0Q&i k vtamtàm i$ tfRdertâ&e» at *ae level of tbesfeboldfogs» a$kig a^vetsfa» 
factor of ï «Jjro equals. KD 6J$9785, Thus holdings convert after roundiajg. to: *A** 
euro. $12&U *Btt euro 46&9lt an** T* euro ?8i«$l* Tbe sew total aœo&ti* lot ifee 
Issue Is therefore euro 1,563 ,Ô>?: equalling* ND ïO,0ÔQ.O3, and compared with euro 
J563+025l$ for a sftapfctfoaveisiOB of tfee original total aaiom the roaj&ding mot 
is eleartyycry smalt -
Were the same issue to be converted on the basis of individual bonds then the 
holdings ,*ouid convert to: "A" e&*o 312,60 (euro Î5430 * two)+ "B* euro 46&90 
(euro 156.30 * three) and *€T euro 78130 (euro 15O0 * five), in Ms example ail 
holdings have tost Î sent. Clearly the larger the holdiag the larger the toss {or gain) 
could be. lîie totaî amount of the issue afier conversion is euro 1563.00. Thus the 
difference is again greater by 2>5 cent» 
11 
Example Two 
«TojHtown» with compensatory jwryments 
An issue expressed in national currency units ("ND") is to be broken down into ND 
I nominal value "pieces.* These ^pieces* are bandied together to produce new 
bonds with a euro 1 nominal value using the conversion factor, imbalances m terms 
of fractions of a bond left over are <5ompensated by small cash payments (though 
there ts still a smart rejwves&aent risk), Thus an issue often bonds» each with a 
nominal value in national deiromination {*ND*) of ND 1000, is broken down to 
10,000 W> I pieces. Assuming a oonversion facto? of i euro equals W> &397$5 
the holding is redenominated into 1,563 bonds each of euro 1 nominal value. The 
difference in valuo of tfa* feolding i$ 2 cent tWJSWfààWfô-là&MS il Thus the 
issue would fee cQttverted.from the original ten ND lOOO bonds into 1?56& euro 1 
bonds and a payaient to bondholders o£cent2«. 
^Tojf^dow^ without compensatory payments 
A» ïssue often bonds, sack witn a nominal value In national denomination (*NDW) 
of ND 1000, is converted into ten bonds of euro ! 5&30, assuming a conversion 
factor of Î euro equals KD &W$$ O00O/&39?8$*J,5$.3O25i)< Tfeus the issue 
would couvert &om ten bonds totalling ND 10,000 to ten bonds totalling euro 
1,563. 
"Top-down* n$rng odd lots 
An issue often bonds, each with a nominal value in national denomination C'ND") 
of ND l000t is Broken down into fifteen round-irlgure euro bonds and one odd-
figure bonds Assuming a conver$ion factor of î euro equals KD $39785 the 
holding is redenominated into fifteen bonds of euro 100 and one of euro 63.05 (ND 
1G,Q0U'&397$$^U63.O2S1 * l5*10O'phis4*63,O3)+ 
Alternatively» to tedu.ee the si$e of the odd lot» a nominal value of euro 50 could be 
selected resulting in thirty-one euro 5Q bonds and one euro 13L03 bond. 
Example Three. 
. "Arbitrary conversion method1* 
Ten bonds each with a nominal value in national currency units ("ND"*) ofND 1000, 
and a coupon of 5%, *s changed to the nearest round nominal.amount» based on a 
conversion factor of euro 1 equals ND 6.39735. The nominal value of each bond is 
changed to 15 6 euro and the coupon and redemption price are adjusted: 
each new coupon equals 5 multiplied by 156-3025 divided by 156 
the new redemption price equals 1000 multiplied by 15&3025 divided by 156 
Were the same arbitrary figure to be^ chosen p&t national denomination then all 
bonds would be subject to the same conversion factor so simplifying the process. 
Ail cash flows would be preserved to the limits of money rounding conventions. 
12 
1.4 conventions applying to redenominated debt 
The basic principle of the continuity of contracts has the consequence that the 
original conventions and rules will continue to apply to an issue that has been 
redenominated. The retention of the original conventions would ensure that bond 
holders' rights are left unchanged and that cash flows and existing hedged 
positions would be unaffected. There would be complete continuity in the 
conditions set out in the original legal documentation. It is the group's firm 
recommendation that existing conventions are retained for redenominated debt, 
and for all outstanding issues and instruments. 
Markets do not require that the same conventions are applied to redenominated 
debt and new euro issues. Fungibility would not be hampered since market forces 
will be able to deal with variants. Moreover, to change the conventions would 
definitely not fall within the scope of the Council Regulation on the euro. 
1.5 exchange offers 
Exchange offers provide issuers with a tool that would allow the redenomination, 
change of nominal value (renominalistion) and consolidation of debt into fewer, 
larger issues. This would increase liquidity and reduce funding costs for the 
issuers. It would also be possible to adopted the market conventions for new euro 
issues, thus enhancing fungibility. Exchange offers are voluntary and hence 
there would be no need to obtain bondholders' agreement nor would bondholders 
be forced to accept redenominated stock. On the down side, it is clear from 
market experience that exchange offers are costly to undertake, expose the issuer 
to market risk whilst the offer is open, and can result in the portion of the original 
issue that remains outstanding becoming illiquid. 
1.6 market rules and conventions 
Greater harmonisation of market conventions towards best practice is a goal 
worth pursuing regardless of EMU. The harmonisation of market rules and 
conventions cannot be achieved without costs; however, many of the costs will 
arise from the introduction of the euro whether there is harmonisation or not. 
Moreover, it is conceivable that without harmonisation, systems would be more 
costly to develop as the multiplicity of conventions for the euro would have to be 
managed. The costs attached to harmonisation will largely be borne by the 
markets themselves, thus it is totally justifiable that the markets should decide on 
the strategy to be adopted. One possibility might be to move towards those 
conventions which are currently the most common, but this must not result in 
harmonisation to the least efficient or outdated conventions. Given the natural 
desire of national markets to retain their own familiar systems a move towards 
harmonisation based on a current national standard would be problematic for 
those countries giving up their current conventions. A possible solution could be 
to harmonise on a current international standard, for example that of the euro 
dollar market. It has become clear from the considerable work already 
undertaken by the market associations in this area, and the recent joint statement 
on market conventions for the euro, that the market consensus is in favour of 
harmonisation, and that the aim should be to select the optimal conventions to 
enhance efficiency and transparency. 
13 
It is simple to produce, in isolation, harmonised conventions for new euro 
denominated contracts, drawn up after the start of Stage Three. However the 
impact of any new* conventions, for example on the ability to execute without 
disruption contracts denominated in national currency units and on 
redenominated debt, must also be considered. Imposing new conventions on old 
contracts could result in the intended economic effect being disrupted. For 
example, a change in business days might result in a position no longer being 
perfectly hedged if one side of the hedge were to be executed a day later than 
originally intended. 
To achieve greater harmonisation decisions on the following will have to be 
made: 
1.6.1. day counts 
The day count convention is the method for determining the number of days 
used to calculate the accrual of interest. 
Within the EU practice varies from one financial centre to another, and in 
some countries the day count convention of the bond and money markets 
differ. 
The current bond mariât éorivéntîbns in the EU ares 
Country.. 
Austria 
Belgium 
Denmark 
Finland 
France 
Germany 
Greece 
Ireiand 
Italy 
Luxembourg 
Netherlands 
Portugal 
Spain 
Sweden 
UK 
Eurobonds flay count basis 
30/360 
mm 
3Ù/368 
30/160 
Act/Act 
3W360 
Act/3^5 
mm 
30/368 + i day 
30/360 
30/368 
30/560 
Act/Act 
30/360 
Act/365 
30/360 
The 30/360 convention is the most common, but it arose largely because of 
limitations in the calculation capacity of the systems that were operating at 
the time of the development of the markets. Thus it is a legacy of obsolete 
technology and has well known inherent weaknesses. A move to Act/365 or 
Act/Act would be totally feasible with modern systems and would bring 
several advantages. 
Act/Act is the most accurate means of measuring accrued interest on bonds 
and thus provides the best practical solution. Moreover, a move to Act/Act 
14 
would provide consistency with the approach adopted by the US Treasury 
bond market, whilst Act/365 would harmonise with the Japanese government 
bond market. It has also recently been proposed that Eurobonds issued after 
1 January 1999 should use the Act/Act methodology. In practice the 
difference between Act/365 and Act/Act is only in the treatment of leap 
years. A move from 30/360 would enhance transparency for investors and 
analysts in the assessment of euro assets against dollar and yen assets. 
Were the EMFs proposal for Act/360 for the money markets to be adopted 
and an Act/Act standard selected for the bond market there would not be a 
serious problem. As stated above, different conventions can apply in the two 
markets. For example, in repo transactions the day count convention of the 
bonds supplied as collateral is used simply to calculate the interest accrued. 
The convention to be applied to the repo is that prevailing in the money 
market even if this is different to that in the bond market. 
Any change in day counts would have to take into account the treatment of 
outstanding instruments. Would it be necessary, for example, to continue to 
make calculations related to "old" instruments on the "old" day count basis, 
or could there be a complete move to the new day counts? It is feasible for 
different conventions to co-exist in the same market, and were new issues to 
be subject to new conventions then over time the old conventions would 
cease to be used. It would nevertheless be essential to ensure that systems 
could accommodate any proposed change. 
1.6.2. coupon frequency 
The norm in the EU is annual coupons. Only Italy and the UK, two of the 
largest and most developed bond markets in the EU, provide for semi-annual 
coupons. Semi-annual coupons would improve the matching of cash flows 
and would reduce the investors' exposure credit risk, and they are the norm 
in the US and Japanese government bond markets. Thus semi-annual 
coupons would be beneficial to the operation of the market and derivative 
products in particular, and would enhance direct comparison with the other 
major world bond markets. However, there does not appear to be a 
consensus in this area. For issuers, semi-annual coupons would entail 
increased costs. Retail investors are also reputed to prefer annual coupons. 
1.6.3. business days 
The existence of different business holidays in the various Member States is 
a factor that is unlikely to change in the short term, and it could hinder the 
use of the euro. The best solution is therefore to create a standard definition 
of what is a business day. For example, today the ECU faces a similar 
problem and the ECU Banking Association produces a calendar of business 
days for the ECU. Its calculation is complicated but in broad terms only 
permits settlement of ECU on days in which a large number of financial 
centres are open in the EU. In practice the ECU calendar is unpopular and a 
similar approach for the euro would probably be unacceptable to the market. 
One option would be to define a business clay as when TARGET and an 
appropriate settlement system are open for business. This would provide the 
15 
greatest number of business days as it is proposed that TARGET, like 
CEDEL and Euroclear, will function for all but two business holidays 
(Christmas day and New Year's day). The need is to agree a common 
approach to allow for there to be as many business days for the euro as 
possible, thus providing the greatest flexibility in terms of matching cash 
flows. 
/. 6.4. euro settlement basis 
The settlement periods, in the various markets, differ greatly across the EU. 
The most common inter-bank offer rate settlement period is a spot standard 
with a two day settlement period. This would be a suitable standard to 
harmonise on for euro money market transactions. Were no standard to be 
implemented the smooth functioning of the euro market could be disrupted, 
and the search for a solution to the business day question made more 
difficult. 
The settlement standard for internationally traded bonds is currently trade 
date plus three business days. With the introduction of real time gross 
settlement systems and the obvious advantages to reducing settlement risk 
there is likely to be a move towards a shorter settlement period. However, it 
may prove least disruptive to retain the current T+3 standard for the euro, at 
least in the short term. 
The most common standard, in the EU, for the fixing of the amount of time 
elapsing between fixing of a rate and its application to a contract is a two day 
period. This should be applied to euro contracts. 
2 The equity markets 
2.1. General considerations 
In general the impact of the euro on organized markets for equities appears to be 
less strong and less immediate than on other segments of the financial markets. 
Issuers tend to focus mainly on their national share market. Trading tends to 
concentrate on the most liquid market which is generally the domestic market.The 
choice of the quotation market is mainly influenced by variables other than the 
currency of denomination (the geographical allocation of the issuer's main 
activities, the country of incorporation, the convenience of listing requirements, 
the way in which the equity market is organized). 
The introduction of the single currency and disappearance of exchange rate risk in 
the euro area will not, at least in the s-hort term, modify the existing relation 
between issuers and their domestic markets. 
16 
In the medium term the combined effect of the single currency and the 
implementation at national level of the Investment Services Directive2 will 
increase competition within the national markets and might affect the structure of 
the equities markets. 
The Investment Services Directive grants authorisation to foreign intermediaries 
to operate on national markets either by physical presence (e.g. a branch) or by 
remote access from other Member States. The conditions for remote access i.e. by 
electronic trading, are already present. The opening of domestic securities 
markets will increase liquidity on national markets and might even strengthen the 
existing links between issuers and their home market. 
From a technical point of view the introduction of the euro will require relatively 
few changes by the stock exchanges themselves. 
In particular, for those stock exchanges which can already operate in a multi­
currency environment the switch to the euro will be simple in technical terms. 
2.2. Impact on market functioning and on companies decisions 
As a consequence of the introduction of the euro, markets and market participants 
will have to review their operating and regulatory procedure and modify their 
trading, settlement and reporting systems. Companies will have to manage 
conversion of their share capital, and therefore will have to deal with 
redenomination issues. 
The introduction of the euro could be an opportunity to harmonise market rules 
and conventions. However, any benefit resulting from harmonisation would have 
to be balanced aginst the costs it will generate also in terms of smoothing the 
transition. 
A certain level of coordination will be needed with derivative markets. Stock 
Exchanges will have to ensure that there will be a common approach with their 
national derivative markets. 
2.2.1. Stock Exchange Operations 
Market practitioners will be looking to exchanges in defining their own 
changeover strategy and it will be under the aegis of the exchanges that the 
markets as a whole will decided on the changeover strategy of their collective 
systems. 
The main European Stock Exchanges, led by the Federation of European Stock 
Exchanges, have announced their intention to pursue a Big Bang approach. 
That would mean that as from 4.1.1999 exchanges will trade and quote all 
securities in euro. 
This approach is based on several considerations: 
2 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field 
O.J. N°L141 11/06/1993 P. 0027 
17 
• having a common changeover date for all organized markets (money 
markets, bond markets, equity, derivatives, regulated or OTC) would 
enable market participants to plan their own systems in the knowledge that 
all securities would be dealt in euro; 
• for many Stock Exchanges this choice is also linked to their inability to 
handle multi-currency trading; 
• in the absence of any significant link between a share nominal value and 
the price at which it is traded, there is no strong argument to have 
securities quoted and traded partially in euro and partially in national 
currencies. 
However, the basic working assumption is that only one currency will be 
supported in any given security for quotes, orders and trade reports. 
There seems to be a general agreement on the need to avoid dual quotation (i.e. 
having two prices, one in euro and one in national currency), for many reasons: 
legal considerations: there is only one price made on an exchange; 
- . the cost and complexity of supporting two currencies in parallel for one 
security makes that alternative less attractive to exchanges and 
intermediaries; 
risk of public confusion. 
The Big Bang approach would imply that: 
• quotations displayed on screens of trading systems would be in euro; 
• transactions would be executed, recorded, matched, confirmed and 
transmitted to settlement in euro. The inter-market settlement process 
would be in euro; 
• intermediaries will have to make the necessary conversion in order to 
account to their clients in the currency chosen by the latter. 
Fixing date of the conversion rates: 
Stock exchanges have expressed the wish to know the conversion rates in 
advance (initially at least one month before). However, conversion plans are 
now being presented which cope with a fixing taking place on the last day of 
the year and a changeover on 4 January 1999. 
In any case knowing the conversion rates does not seem to be crucial for 
testing the systems. Tests could be carried out in advance by using a rate 
approaching the conversion rates such as the current ecu rate. Anyhow, some 
markets might decide on an additional closing date (31st December) for 
changing and testing the systems. 
Unsettled orders: 
According to the big bang approach, all transactions executed in national 
currency for due settlement after 1.1.1999 should be settled in euro. The 
conversion will be executed by the Stock Exchanges and the security 
settlement systems. 
18 
Unexecuted orders: 
Unexecuted orders remaining in a central order execution system on the last 
business day of 1998 should be canceled. 
Intermediaries will have to convert and reintroduce such orders. 
Notice should be given sufficiently in advance of this intention in order to 
allow intermediaries to agree on an automatic conversion procedure with their 
clients. 
2.2.2. Redenomination 
In the context of equity markets, redenomination is the conversion of the par 
value of the shares into euro. Such simple conversion may be combined with a 
change of the nominal value into a round amount, in such case one should be 
talking about renominalisation. 
Given that share capital is permanent, the case for redenomination is stronger 
than for other securities, One cannot expect that old denominations will 
gradually disappear on their own as will be the case for maturing debt. 
However, the impact of redenomination on market liquidity and market 
operations seems to be very limited or even non-existent. Indeed equity shares 
are units of the total capital stock. Their nominal value is not relevant to the 
price at which they trade. Therefore a change to the currency in which their par 
value is expressed need have no effect on the value of a share. 
• WHEN SHOULD REDENOMINATION OCCUR? 
Redenomination is a natural consequence, of the change to the euro of a 
company's accounting unit. It is a company decision independent from a 
stock exchange's decision about trading in euro. 
It is not essential that redenomination happens at the beginning of Stage 
Three as the denomination of share capital should neither affect its 
economic value nor investors' ability to trade the shares. 
Redenomination can take place at any time during the period 1999-2002. 
If nothing has been done by the end of transitional period, redenomination 
will occur automatically by application of the "109 1(4)" regulation. 
In order to avoid extra costs, a company wishing to redenominate its shares 
might take the decision at an annual general meeting (AGM). A resolution 
could be made even before 1999 by empowering the Board of Directors to 
make changes to the capital in a certain specified way (by moving to non 
par value shares or by having a capital increase). 
• WHO HAS TO DECIDE ON REDENOMINATION? 
Redenomination is a decision of the shareholders' meeting. 
In some cases there may be a need for prior changes in national legislation. 
That would be necessary in some countries to authorize non par value 
shares or to authorize companies to issue shares in euro (e.g. in Sweden) or 
to change the minimum authorized share amount. 
19 
• WHAT SHOI ILD RE THE PRINCIPLES SUPPORTING REDENOMINATION? 
It seems generally recognized that as a consequence of redenomination: 
voting rights should not be adversely affected; 
holders should not be obliged to sell any part of their holding. 
Moreover in order to avoid changes in relative prices it seems desirable that 
the number of issued shares remains unchanged. 
• WHAT ARE THE MODALITIES FOR REDENOMINATION? 
There are four main options available to a company that wishes to 
redenominate its equity: 
A) leave shares indefinitely with a par value of unrounded euro; 
B) convert the share par value rounding to the nearest cent; 
C) change the par value to a round number of euro and have a common 
nominal value; 
D) move to Non Par Value shares. 
These methods should be applied to avoid mismatching between the 
converted nominal capital and the total of converted par values. 
Examples of the different methods are given below: 
A) Leave shares with an unrounded par value in euro 
This method is to convert the share capital into euro at the. fixed conversion 
rate (rounding up or down to the nearest cent) and then to divide by the 
number of issued shares keeping the share par value in euro unrounded. 
This method would avoid mismatching between the converted nominal capital 
and the total of converted par values. No action would be needed on the part of 
the company apart from a shareholders' resolution. The shares could be 
rounded up on some future occasion when the company wishes to make a 
capitalization issue. 
In order to avoid rounding errors it might be necessary to have shares with par 
value specified to several decimal places. At first sight that doesn't seem to 
have any implication. 
However, unrounded par value might not be practicable as the number of 
decimals will need to be limited at least for reporting purposes (i.e. in the 
company's statutes). If a rounding takes place, it would result in a change in 
the total share capital which should require additional action on the part of the 
company. 
B) convert the par value of each share into euro, rounding to the nearest cent 
This method is to convert the share par value into euro by applying the fixed 
conversion rates and the rounding rules foreseen in the "235" EC Regulation, 
the nominal share capital being the sum of the par value of the shares in the 
issue. 
20 
If no specific action has been taken by a company at the end of the transitional 
period, shares par value will be deemed to be converted into euro according to 
this method. 
As' a result of this method the sum of the rounding ajustments on each 
individual share will alter the nominal share capital of the company, up or 
down. 
In order to correct this mismatch, two options are available to a company: 
i) increase the capital by a capitalization of reserves, or 
ii) decrease the capital by a transfer to reserves. 
Each of these options has different implications: 
A capitalization of reserves would not be practicable for companies which do 
not have sufficient free reserves available. 
A decrease of capital might not be permitted by national legislation or might 
require a special procedure (in UK Court approval would be necessary). 
Changes to capital amounts might give rise to taxation effects for shareholders. 
The amount of capital increase or decrease required will depend on the 
conversion rate and on the nominal value of the shares and their number. The 
effect will be greater for low value shares issued in large number. 
C) Change the par value to a round number of euro in order to have a 
common par value of 1 euro ( Renominalisation) 
Following this method the share capital is converted into euro at the fixed 
conversion rates (rounding up or down to the nearest unit). The share capital is 
divided into shares with a par value of 1 euro each. In order to retain the 
original share of the shareholder in the share capital, the euro share capital and 
thus the number of shares will have to be adjusted accordingly. 
This could be achieved either by a capital increase or a capital decrease. 
The effect on capital will be even greater than for simple redenomination by 
rounding to the nearest cent. 
A futher possibility of renominalisation would be trading in fractions keeping 
the share capital unchanged. 
Trading in fractions would involve very high costs as it would require either 
that stock exchange mechanisms be modified, or that intermediaries trade in 
fractions to build whole shares. Moreover the fractions method would oblige 
shareholders to sell part of their holdings. 
Renominalisation would change the number of shares issued by a company, 
thereby changing apparent share prices. 
Given that the price of a share bears no relation to its nominal value, there 
seems to be no advantage in having a common par value across Europe. 
Moreover such harmonization would be very difficult to achieve given the 
differences in par values across Europe. 
21 
D) Move to Non Par Value shares 
In a NPV system, shares are simply a fraction of the capital stock. NPV shares 
make the conversion to euro very easy. ,Once the company's articles have been 
modified to provide for NPV shares, indicating the share capital, the number of 
shares issued and the minimum issuing amount, no further acticta is required to 
convert to the euro. 
With NPV shares there is no need for a physical exchange of share certificates, 
if any. The share prices can be lowered by simple splitting and there is no 
need for a capital increase or decrease. 
Moving to NPV shares allows a company to avoid capital and cost intensive 
measures. 
NPV shares are allowed by the second Community Company Law Directive3, 
but in many countries the relevant national legislation has not yet been put in 
place. In the short term an amendment to national legislation would be 
required to allow the NPV solution to be implemented. 
• SHARE CERTIFICATES 
A legal requirement to replace share certificates as a consequence of 
redenomination would involve considerable work for Registrars and 
substantial costs for issuers. 
If redenomination occurs in 2002 as a consequence of the "109 1(4)" 
Regulation no replacement of the share certificates will be needed, provided 
that redenomination is effected by applying the fixed conversion rate and the 
rounding rules defined in the "235" Regulation. In the case of renominalisation 
however, where the number of shares will change, it is likely that share 
certificate will have to be replaced. 
Companies might take this opportunity to dematerialise their shares, where this 
is not yet the case. 
EXAMPLES 
The conversion of the share ftomfoal value into euro by applying the fttfed cottVersiou 
factor would result in. a. nominal value expressed in euro with several decimals. The 
examples below iltastratethe different effects according to the method used 
Company^ share sapitaU 250,000,000 (expressed in nôttooal dansmtoatfajft *NI>U> 
divided into 50,000,000 shares with a par value of 5 ND 
assuming a conversion rate of 1.95591 
3 Second Council Directive N° 77/91/EEC of 13 December 1976 on coordination of safeguards which, 
for the protection of the interests of members and others, are required by Member States of 
companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the 
formation of public limited liability companies and the maintenance and alteration of their capital, 
with a view to making such safeguards equivalent. OJ.N°L026 30/01/1977 P.0001 
22 
Example I ; Option A "unrounded par value" 
Share capital in euro; 250,000,000/1.95591 « Î27,817,742.13 
$îiare nominal value in euror 127,&7,742.13/50,000,000 « 2.55o"3S4&426 
gyanipk^Option B,»;gftare noniïnaMatoe,rot>ffîfcri tff„fleg,rest,een<:* * 
Slim nominal valW in Wot 5 / l,9$59i^i556354$4iSQ3^round^ to the nearest 
cent)«*2*56 ., ,s -.' \-")' * 
Mm capital 12S6 x' 50,000,000 M 128#0OjÛO0 euro , ' 
Capital increase rgquJted.f* l$2,257+$7 euro* v 
Example 3? Option C MRettomiaalisatfoq faro shares with a nominal value of 1 euro 
share capital: 250,00,0,000/13559!- 127,317 J42 {rounded to the nearest unit) 
divided into 127,817,742 chares of I euro 
previous share nommai value 5 KD « 2.56 euro 
i)capltaj increase option 
the shareholder wjirreceive 3 one-euro abates for each 5 ftD share held 
total .share capita! « 150,000,000 euro 
capital increase required:22,182,258 euro (17.35 %) 
u) capital reduction option 
the shareholder will receive 2 one-euro shares for each 5 ND $haie held: 
total share capital 100,000.000 
capital reduction required: 27.8 J 7,742euro (21,76%) 
Example 4: Option D "Non Par Value shares" 
share capital 250,000,000 ND represented by 50,000,000 shares 
each share represents 1/50.000,000 of the share capita] 
aftei conversion; 
share capital ~ 127.817.742.13 euro 
each share slill represents 1/50.000,000 of the capital 
CONCLUSION 
Redenomination of shares is a company decision which is not linked to the 
operations of the markets. There is therefore no need for immediate 
redenomination. 
If a company wishes to redenominate its shares, several solutions might be 
convenient. 
As a result of the fixed conversion rales it will not be possible to avoid 
rounding errors even if share par values are expressed with several decimal 
figures. 
23 
The capital increase solution could also be attractive for some issuers and 
could be easily implemented by having a prior authorization given by an AGM 
(as authorized by the Second Company JLaw Directive). 
The easiest solution would be to move to NPV. In countries wfyere NPV shares 
are not yet introduced, the necessary legislation should be prepared as soon as 
possible. 
A suggestion has been made that there should be legislative measures at 
national level which.might facilitate the process (for example by authorizing 
redenomination by a resolution of the Board of Directors). 
Such a derogation might however, be interpreted as imposing the use of the 
euro on shareholders therefore breaking the principles stated in "109 1(4)" 
Regulation. 
Although it might appear difficult to achieve, given the large number of issuers 
and the differences in share values, harmonization of redenomination 
techniques would bring considerable advantages for market participants. On 
the one hand costs could be reduced and on the other hand, clarity and 
transparency would be increased in particular for investors. 
Particular attention should be paid to hybrid instruments such as preference 
share and interest bearing shares, for which the nominal value is more 
important and which would involve similar problems to those of 
redenominating bonds. 
2.2.3. Market conventions 
In general there seems to be very little case for harmonization of market 
conventions in equity markets. The general attitude of Stock Exchanges is to 
avoid any change in market conventions which is not strictly necessary for the 
changeover. 
Trading in round lots 
The size of a round lot varies according to the price of the share. There appears 
to be very little to gain by looking for international harmonization of the size 
of round lots. Keeping unchanged conventions will contribute to continuity. 
Convention of tick sizes 
New conventions should be defined for securities quoted in euro. 
The possibility of a standard scale of tick sizes to be used by all exchanges 
could be studied. 
Thresholds 
New threshold amounts will have to be fixed at convenient equivalent amounts 
rather than directly converted at the official exchange rates. 
Settlement 
An efficient settlement of securities is a pre-condition for efficient markets. 
Domestic settlement systems are called to improve their efficiency. However 
24 
desirable a standard settlement period could be it appears improbable that it 
will be achieved in a near future. 
For some countries, moving to a standard settlement period (as T+3 )would 
require extensive changes to their settlement periods. Others would be 
reluctant as they are already considering same day gross settlement. 
This is, however, an issue on which further work is required. 
2.3. Other areas of concern 
2.3.1. Historical data 
Some exchanges provide historical price series as part of their service to their 
members and customers. This involves making adjustments for rights issues, 
capitalisation issues, consolidation and other corporate events which affected 
the share price in technical ways. 
It seems perfectly possible to ensure continuity of this kind of information by 
restating historical series of prices in euro using the conversion rates. 
Particular problems might arise when restating historical series involving 
several participating currencies. 
2.3.2. Stock market indices 
It is of major importance that indices are not disrupted, given the large volume 
of index-linked derivatives. 
What is important for continuity of indices is that the underlying company 
composition and the value of the equities stays the same following the 
changeover. 
Given that the value of equities is not linked to their denomination, and that 
the rules for making changes to the company composition are based on 
relative market capitalisation, there is no need for existing indices to be 
affected by changes in the denomination of shares. 
3 The derivative markets 
The successful resolution of issues raised by the start of Stage Three of EMU for 
the market in privately negotiated derivative transactions is crucial to the creation 
of a broad, liquid, deep and transparent market for the euro. 
The scope of activity covered by the swaps and privately negotiated derivatives 
market is extremely broad, ranging from interest rate, currency, equity and other 
swaps, to options and other derivatives. It is therefore not surprising that the 
transitional issues relevant to the derivatives markets mirror those of the 
underlying markets to which they relate. For example, the same issues that arise 
in the context of public and private bonds, the money markets, equities, equity 
indices, foreign exchange and futures markets, are of direct relevance to the 
associated sectors of the OTC derivatives markets. 
3.1 characteristics of existing EU derivatives markets 
25 
Swaps and other privately-negotiated derivative transactions are now widely used 
by corporates, financial institutions, pension funds, governments, governmental 
bodies and investment funds as an essential tool to manage currency, interest rate 
and other financial risks to which their day to day activities expose them. The 
size and breadth of European derivatives markets together with their innovative 
approach to facilitating complex financial structures means that Europe is a 
leading centre for this type of business. The EU's continued status as a leading 
centre for the world's financial community relies upon the existence of a 
flourishing derivatives. market. It is therefore essential that any potential 
obstacles created by EMU should be overcome and that problematic issues should 
be resolved as early as possible to maintain confidence and create certainty 
among market participants. 
3.2 principal concerns regarding the introduction of the euro 
The overriding concern faced by participants in the derivatives markets is 
continuity of contract. The complex nature and maturity of certain derivatives 
transactions means that they are more likely than other types of financial 
contracts to be subject to claims based on legal doctrines of frustration or 
impossibility. Although continuity of contract is beyond the scope of this report, 
it is worth noting that the adoption of the two Council Regulations on the 
introduction of the euro (under Articles 1091(4) and 235 of the Treaty) will help 
to ensure a firm legal basis for the start of the Third Stage. 
As noted above, most of the technical issues relevant to the derivatives markets 
are not peculiar to those markets and, in fact, mirror the issues already considered 
in relation to the underlying markets. However, it is clear that any measures 
taken to resolve those issues for the underlying markets should be paralleled in 
the derivatives markets. It is important to recognise, for example, the close links 
which exist between a transaction in the cash market and an associated hedging 
transaction. Clearly the protection provided by the hedge against movements in 
the underlying market should not be disrupted by the occurrence of EMU. 
Equally, it is important to ensure that the matching of cash flows between the 
hedge and the related cash market contract should continue: any danger of a 
mismatch in cash flows should be avoided. 
When considering the impact of EMU on derivatives, the markets should 
therefore take care to: 
• ensure legal continuity of both the underlying contract and the hedging 
contract; 
• achieve transparency and clarity in relation to the conventions used to 
calculate payment amounts and to determine payment days; and 
ensure that changes made to the underlying contract by way of 
conversion, redenomination, or the adoption of new price sources, are 
accurately paralleled in the related derivatives transaction(s). 
3.3 technical issues 
26 
Since many of the technical issues for the derivatives markets rely on the same 
analysis used in considering the cash markets, this section of the report is brief. 
3.3.1. redenomination 
From the perspective of participants in the derivatives markets, the preferred 
method of redenomination of debt would be one which achieves the highest 
degree of accuracy. Accuracy in the redenomination process would help to 
limit possible cash flow mismatches between a redenominated bond and a 
hedge which was in existence prior to redenomination. 
The method of redenomination which seems likely to give the most exact 
result is the "bottom-up" approach. As a means of limiting cash flow 
mismatches, this approach is likely to find favour within the derivatives 
markets. 
A method of redenomination involving an offer of conversion would also be 
acceptable. 
As noted earlier in this report, there is unlikely to be a single common 
approach to redenomination. Market participants would, however, prefer to 
see a minimal number of alternative methods used. The additional resources 
and systems modifications required to deal with more than two or three 
methods of redenomination would impose an unwelcome and unnecessary 
burden. 
Again, as noted elsewhere in this report, care should be taken to ensure that, 
whichever method of redenomination is used, it is carried out with due regard 
to the legal rights of bondholders. 
3.3.2. market conventions 
The harmonisation of market conventions is an object which is supported by 
participants in the derivatives markets, including the International Swaps and 
Derivatives Association, Inc. ("ISDA"). Although financial institutions 
dealing in swaps could be able to cope, as now, with the existence of different 
conventions in the bond markets, the benefits of harmonised conventions for 
the euro, in terms of creating a broad, liquid and transparent market, are clear, 
as are the difficulties of retaining a diversified approach: increasing the scope 
for inconsistencies and potential disputes. 
The discussion section 1.4 of this report on the possible application of new 
conventions to redenominated debt is of particular relevance to the derivative 
markets. To avoid mismatches between the conventions applicable to a 
redenominated bond and an existing hedging transaction, the old national 
conventions should be retained in respect of the bond. 
One method by which new conventions could be applied to redenominated 
debt, but which would cause minimum disruption, would be to make express 
contractual provision in the terms of the bond. Sufficient contractual 
flexibility both to redenominate and to adapt applicable conventions could be 
introduced into bonds issued in national currencies before the start of Stage 
27 
Three. This would, of course, require associated hedging arrangements to 
include the same degree of flexibility on terms which exactly paralleled those 
of the underlying bond. 
Another way to maintain consistency between redenominated bonds and 
hedging transactions would be to redenominate by means of the conversion 
offer approach. If existing national currency bonds were exchanged for euro 
denominated bonds subject to new conventions, associated swaps could be 
replaced at the same time. 
Specific recommendations for harmonised market conventions are included in 
a joint statement published by among others, ISDA. ISDA's 
recommendations, which are in line with those recommended by this report, 
are based on a consultative process among its member institutions and other 
interested parties. 
3.3.3. price sources 
The implications of EMU for price sources in general are dealt with separately 
in a section below. Derivative transactions rely upon the existence of 
published price information. This is therefore an area of particular concern for 
the derivative markets. 
Typically, an interest rate swap document using ISDA standard form 
documentation refers to a price or rate, displayed on a screen. For example the 
floating rate leg of a swap may call for an amount to be payable by reference to 
French franc LIBOR as displayed on Telerate page 3740 as of 11:00 a.m. 
London time, on a particular day. If, due to EMU, French franc LIBOR were 
no longer to be displayed on Telerate page 3740, the 1991 ISDA Definitions 
would enable the relevant calculation to be made by reference to a rate 
appearing on an alternative screen page, provided the alternative page displays 
a comparable rate and is a replacement for page 3740. Failing this, the 
calculation agent for the relevant transaction would be required to obtain 
quotations from a number of reference banks. 
The exact details of how price sources will alter or develop during the 
transition to the euro are therefore important for transactions involving "in" 
domestic currency units and documented using ISDA definitions. To enable 
appropriate steps to be taken to ensure that continuity is maintained for these 
transactions decisions have to be taken and published as soon as possible by 
the current price source sponsors. Once it is known how sponsors intend to 
proceed the screen providers will be able to liaise with their customers in 
developing appropriate replacement screens as necessary, and subsequent 
systems and documentation amendments can be made. 
4 Other market features 
4.1 price sources 
28 
The introduction of the euro raises the possibility that some or all price sources 
for participating national currency units could cease to exist, perhaps replaced by 
euro rates. Moreover, it is conceivable that some national price source panels 
might cease to function. Again these panels might be replaced by euro-area 
panels. Price sources are a key element of a number of financial contracts and the 
exact terms governing their application will vary depending on the instrument in 
question. Thus these possible developments raise legal and systems issues that 
must be addressed with urgency. If price sources are to disappear or change then 
market participants must have sufficient time to prepare to ensure that the 
continuity of contracts is maintained. 
Therefore, it is of critical importance that price source sponsors quickly state 
which national price sources will continue in existence after the start of Stage 
Three and how those prices will be generated. It is equally important for there to 
be clarity in what new euro price sources will be created. 
The introduction of the euro has two possible implications for price sources. A 
particular price source is no longer available. The panel providing the defunct 
national price sources decides not to produce a replacement rate for euro. For 
example, a swap may currently have a floating rate determined by reference to 
FRF PIBOR. Assuming the FRF is replaced by the euro will a FRF rate continue 
to be quoted and will the PIBOR panel of banks continue to quote a rate but for 
euro? 
The principle of the continuity of contracts would appear to argue that existing 
price sources are retained. Also the proposed Council Regulation for the euro, 
based on Article 1091(4) of the Treaty, states that, "acts to be performed under 
legal instruments stipulating the use of or denominated in a national currency unit 
shall be performed in that currency unit". On the other hand, there is no 
prohibition on moving to the use of the euro, and it is clear that the money 
markets will switch to the euro at the start of Stage Three; moreover, there will 
be only one currency, the euro. It would therefore appear, on balance, to make 
sense for panels to cease quoting national currency rates and to move to euro 
rates. 
Ultimately it will be for the price sponsors to decide whether to switch to euro 
rates. In many cases the price sponsors are central banks, but several rates are 
sponsored by associations, such as the BBA for LIBOR and the GBA/ZKA for 
FIBOR. The key requirement, regardless of who sponsors the rate, is for a quick, 
transparent decision to be made. If rates are to change then screen service 
providers will require time to propose how the new rates are to be presented and 
to reach agreement on the new format with their clients. 
It is possible that price sponsors decide to cease quoting any rates, national 
currency or euro. There is a strong possibility that a number of national price 
source panels will be wound up and new panels will emerge providing rates for 
all or part of the euro area. Such an initiative, called EURIBOR, has already been 
proposed. To ensure confidence in any new euro area rate the methodology for 
the selection of the panel that would set the rate must be transparent and credible. 
Whilst it is clearly a competitive matter whether one or more euro rates should be 
available, and currently there are competing price sources for specific rates, it 
29 
cannot be automatically assumed that a national prices source will be succeeded 
by a euro-area source rate. 
In terms of published rates, several outcomes can be envisaged if pricing panels 
disappear. The screen provider might refer the user to a substitute euro rate, 
displayed on a different screen. The existing reference screen might be revised to 
display a euro-area rate, such as EURIBOR. The screen might still display the 
old national rate (PIBOR etc) but the rates might actually be euro ones, provided 
by a new price source panel. Whichever route is selected, again the key 
requirement is for an early decision. Screen providers face a significant 
challenge. They might need to provide additional screen pages because, for 
example, a switch from national currency rates to euro ones may involve the need 
to change market conventions. For instance, the Belgian Franc money market 
rates are currently quoted on an Act/365 basis whereas the most likely convention 
for euro is Act/360. Thus if existing contracts are to be governed by existing 
conventions it will be necessary for screen providers to make provision for 
quotations based on market conventions for both old national currency units and 
euro. 
4.2 Issuing procedures for sovereign debt 
There is concern that the presence of national debt offices and the ECB debt in 
the same section of the curve could confuse monetary policy signals to the 
market. This could be particularly dangerous in the early stages of the transition 
to the euro when the learning curve will be particularly steep.. Increased co­
ordination, formal or informal, between sovereign issuers could enhance liquidity, 
transparency and predictability in the markets. In addition, the pre-announcement 
of auction calendars would help. However, issuers and some market operators 
disagree arguing that issue policy is a matter for free competition and should be 
kept separate from monetary policy. 
The harmonisation of syndication and tender procedures is not required by 
monetary union. However, the introduction of the euro will highlight the 
existence of regulatory barriers to a true single market in this area. The 
introduction of the euro should be taken as an opportunity to remove the 
requirement that primary dealers have to be located in the country of the issuer. 
Regulatory requirements enforcing institutional investors, such as insurance 
companies, to hold specific government and domestic currency assets will no 
longer be justifiable on the grounds of foreign exchange risk in the euro area. 
4.3 ratings: sovereign debt 
It is contended by some that membership of the euro-area could result in an 
adjustment for some sovereign credit ratings. This is based on the argument that 
euro denominated debt should be treated as foreign currency debt because 
individual participating countries will not be able to monetise their euro debt, 
having transferred monetary sovereignty to the ECB. It is also argued that there is 
uncertainty about the efficiency of the fiscal policy rules to be applied in Stage 
Three of EMU 
Against this it has been argued that membership of EMU will strengthen fiscal 
policy in terms of discipline and credibility. It therefore seems counter intuitive 
30 
that a country that meets the Treaty criteria could end up with a lower credit 
rating than a "pre-in" country still in the process of making necessary fiscal 
adjustments for domestic currency denominated debt. It should also be noted that 
monetary financing of debt is already not available to Member States. Another 
important factor is the continuing ability of participating countries to levy tax. 
Fiscal policy remains firmly a national competence. There is no "federal" taxing 
institution within the euro area. Comparisons with regions of federal states, for 
example the US or Canada, fail to take this difference into account. 
The cost of raising debt for an individual country is unlikely to be significantly 
changed by a small adjustment in its credit rating, given the importance of other 
factors, such as liquidity and the efficiency the country's primary dealer system. 
4.4 ratings: corporate debt 
The EU will probably be rated AAA and thus corporates will no longer be 
potentially capped by the credit rating of the country in which they are located. 
In general, however, corporate ratings are unlikely to change significantly 
because of EMU. Broadly, EMU should have a positive effect on corporate 
ratings as the main benefits of the single currency will immediately flow to the 
corporate sector. Over time investors may look to diversify their portfolio by the 
acquisition of corporate issued by companies located in other participating 
countries. Thus credit ratings will become increasingly important in a larger 
market in which name recognition may be low. 
The proposal by the EMI to include non-sovereign debt in the pool of eligible 
assets, for open market operations of the ECB, based in part on credit standing 
raises the question of how to assure consistency of ratings across the euro area. 
4.5 benchmarks 
The benchmarks for national currencies are provided by the debt issues of the 
respective governments since these are recognised by the market as the best proxy 
for the risk free rate of return. For the euro such an approach will not be possible 
because no one country will have complete control over the euro. For the 
foreseeable future there will be no one euro-area issuer of appropriate status (i.e. 
no "federal" issuer of debt). In this situation other proxies will have to be 
identified. 
While it is not foreseen at present that a euro-area wide official issuing calendar 
will be put in place, informal co-ordination of major sovereign issues seems to be 
a likely result of EMU. Potential benchmark issuers will need to present new-
issue calendars with regular issues, scheduled well in advance, to obtain the 
markets support. This may result in certain countries introducing changes to 
increase the efficiency of existing issue procedures. The degree of change will be 
determined by the extent to which such features are seen to be crucial for 
benchmark status. 
It is also worth noting that supra-national AAA issuers with sufficient issuing 
volume could compete with sovereign issuers for benchmark status. The EIB has 
repeatedly indicated its ambitions in this respect. It is perhaps unlikely that an 
individual supra-national issuer might become the sole benchmark issuer for the 
31 
euro but it is conceivable that in the case of different issuers fulfilling the 
benchmark role for certain particular ranges of the maturity range (e.g. due to a 
lack of issuing activity in certain maturity ranges by some Member States) then 
one or more of those issuers might not be sovereigns. 
4.6 repos 
The EMI has set out its proposals for the official repo market. The intention is to 
provide a single instrument delivering identical economic effect in all countries 
participating in the euro. 
Eligible counterparties will be selected on a uniform basis. The precise procedure 
has yet to be finalised. Eligibility of assets for collateral will be based on a two-
tier system. Tier I will consist of assets that fulfil euro area-wide eligibility 
criteria specified by the ECB. Tier II assets will be specified by the NCBs under 
guidelines from the NCB, and will be of particular importance to national 
markets. Though individual NCBs will select Tier II assets such assets will be 
eligible throughout the euro-area, not only in the country of the relevant NCB. 
Market participants are particularly keen to avoid the overly aggressive use of 
initial margin/haircut in the official repo market as this would be an unnecessary 
restriction on the development of the market. Margining of ESCB financing 
transactions is of utmost importance for the efficiency of the capital markets. 
There are three main reasons: 
• the higher the efficiency of margining agreements the higher the transparency 
of money market rates as signals of monetary policy, 
• more efficient margining agreements allow those institutions that rely on 
central bank liquidity provisions to manage their balance sheets and their 
working capital much more efficiently, 
• the ESCB, with its own practices, will inevitably set the standards for the 
whole of the European capital markets. The adoption of inefficient practices 
will inevitably imply a less efficient European capital market. 
The objective of margins is to ensure counterparties remain fully collateralised 
throughout the term of a transaction. Thus the lender always holds collateral of 
value equal to the loan. The borrower posts collateral that never exceeds the 
value of the loan. This general objective is met through the use of symmetric 
daily marking-to-market of the collateral. If the collateral has fallen in value the 
borrower is required to provide additional collateral to ensure the lender remains 
fully collateralised. Similarly, should the collateral rise in value the borrower 
may require the lender to return a portion of the collateral. This returned 
collateral might then, for example, be employed to provide additional collateral to 
another counterparty with whom the borrower has engaged in an offsetting trade. 
Currently in the industry there are two kinds of margins, initial margin and 
variation margin. The level of initial margin should be determined primarily by 
the credit standing of the counterparty and the term of the repo (because the 
longer the period the greater the risk of default). Market risk, which remains 
borne by the initial owner of the securities not the buyer, should be fully covered 
32 
by variation margin. In the repo markets, in general, initial margin is seen as an 
inheritance from the past, and is being discarded because variation margin based 
on daily symmetric marking-to-market is far more efficient. Differences in credit 
risks are reflect in the repo rate, that is the rate of return earned by the supplier of 
cash. However, if the ECB's official repo operations are undertaken on the basis 
of a single repo rate then any differences in sovereign credit ratings could not be 
reflected in the repo rate and would have to be reflected in different initial 
margins. If these differences were ignored then there would be a danger that 
counterparties would tend to deliver the cheapest possible collateral. 
Examples for variation to*irgt*un& for repos 
• A central tak leads £€$2 JtèOt&n. to a cotHtferprty ma reserves the frertcfc OAT IQ% 
Feb 26 £00 L The fade & executed fot value Feb 24 19S& The bond h trading *t 
119JO in the cask market Accrued interest Is 9346 points (364 days) so the all-in 
price is 129M& W& tte repo counterparty would need to deliver T74&3I iao of the 
OAT 10% Feb 26 2001 for the central bank tfr be My collateralised. 
Two days later the hoiiîï wjlî pay its coajjon {of BCtl 7,749,200} which, ander the terms of 
the repo agreement,, the central timk is obliged to pay to- the repo eoutite^rty as & 
manufactured dividend. Hie central hank would now he under-coîïateraiïsed by almost 
WÂ wrthoatthe provisos» of additional collated 
» The price of a bond could*fall, $ay, JO points over the coarse of ten tradiag tta$& If a 
counterparty ha$ a<* abligation to Increase the collateral the central bank would sickly 
become under-coïtateraîîsed. 
• A repo counterparty lends ECU ïÛQmn of collateral to a central bank versus cash and 
then the market rallies over the following ten trading days. The collateral increases in 
value to ECU I Ifcnusu If the eonoterparty ha$ an o$sefc*rjg matched book transaction 
the ECU lômn will be required as additional collateral. 
To prevent unnecessary transactions exposure the counterparties generally agree a margin 
trigger level» such that niarket taovements m the ^alue of the collateral that are below such 
trigger levels do not initiate variation margining. 
The example above illustrates the importance of symmetric variation margins, even in the 
situation where the cash leader Is the highest possible credit* with zero default risfc There 
are two reasons why symmetric margining is essential 
• Asymmetric margining biases the economics of the transactions in favour of the cash 
lender. This would result in bias in money market rates and reduce transparency. 
• Asymmetric margins actually increase the credit risk of the cash borrower (as shown by 
the third example above). Most market participants have matched positions in their 
securities portfolio. Asymmetry in their collateral exposure increases the volatility of 
cash flows thus increasing the risk of default. 
There are situations in which the application of symmetric marking-to-market will not 
significantly reduce risk exposure to the underlying collateral. The typical case is the 
absence of reliable prices for the collateral, for example When the collateral is not actively 
traded in a liquid market. This may potentially be the case for some assets included in Tier 
Ï1. In tins situation the application of the less efficient initial margin in conjunction with 
symmetric raarking-tO'inarket might represent a satisfactory solution» 
33 
4.7 reserve requirements 
The EMI has published details of the possible use of reserve requirements as an 
instrument of monetary policy. This preparatory work is required by the Treaty 
but the decision on the use of reserve requirements will be taken by the ECB. 
The effectiveness of reserve requirements is outside the scope of this report; 
however, it is important to acknowledge the significant concerns market 
participants have raised concerning the effects of the imposition of reserve 
requirements. 
In particular their concern is focused on the additional costs reserve requirements 
would impose on certain financial transactions in euro. There is a danger of 
dislocation of the new euro markets and activity being driven offshore. This view 
is a result of a keen awareness of the past experience of the dislocation impact of 
derivatives: reserves have, for example, been influential in causing DEM money 
market and repo activity to relocate outside Germany. Financial activity is by 
nature highly mobile. Financial participants can quickly restructure business to 
avoid additional costs, and any who did not would be subject to competitive 
disadvantage. 
There is a very large consensus among market participants that the imposition of 
reserve requirements might undermine the development of a unified financial 
market in euro. 
While the strong industry preference, across all markets and all countries, is that 
reserve requirements should not be imposed, if they were to be employed then 
there are mechanisms that would reduce the adverse impact. Specifically, the 
reserves might be set at zero or be fully remunerated. Either would alleviate the 
dislocation impact; however, it is important to note that the fine margins for 
some markets would mean that reserves that are only partially remunerated would 
still distort prices sufficiently as to provide an incentive to relocate activity. 
Finally, as a further technical matter, it should be noted that in order for market 
participants to make the necessary system preparations for reserve requirements it 
is important that the exact scope and structure of such requirements are decided as 
quickly as possible. Markets expect therefore the ECB to announce as soon as 
possible after it is established, in 1998, a fully detailed implementation plan. 
4.8 regulation, restrictions and taxation 
Regardless of the level of harmonisation achieved in terms of market conventions 
and practices there will still be distortions resulting from differences in national 
tax regimes and regulatory rules that place restrictions on trading and investment. 
Harmonisation in this area appears difficult to achieve in the short term, but the 
introduction of the euro will increase the awareness level of such distortions as: 
• distortions reflecting national tax regimes 
34 
• different levels of investor protection 
• national restrictions on trading and investment, such as restrictions on the 
kinds of assets pension funds can invest in 
In each of these three cases, the Commission is proposing action to reduce 
distortions. In order to remove tax distortions, the Commission's Action Plan for 
the Single Market asks Member States to confirm the priority of working towards 
agreement on a tax package designed to achieve a balance between their interests, 
which will include: 
• a code of conduct designed to tackle harmful tax competition, which causes 
difficulties for every Member State; 
• measures to eliminate distortions to the taxation of capital income, notably to 
ensure effective taxation of cross-border savings, while preserving the 
competitiveness of European financial markets; 
• measures designed to eliminate withholding tax on interest payments between 
companies, which form part of long-standing efforts to remove disincentives to 
cross-border economic activity (double taxation). 
In the case of investor protection, there is an existing structure of harmonised 
minimum rules, leaving some margin for national interpretation, notably on the 
meaning of 'the general good' as applied to the protection of investors. 
In the case of restrictions on trading and investment, the Commission Green 
Paper on 'Financing Retirement in the Single Market' notes that the prudential 
supervision of the investment of pension and life assurance assets has the effect of 
keeping a large share of these assets in domestic government bonds. It argues for 
a common approach based on prudent man principle. This would remove the 
need for most of the quantitative restrictions, while currency matching 
requirements in particular will be made obsolete within the euro area by the 
introduction of the single currency. 
The market for mortgage credit (mortgage bonds are the largest instrument on the 
European capital markets after government securities) is particularly restricted by 
differing regulatory requirements. These will be accentuated when what has 
hitherto been the main obstacle to cross-border funding - the currency difference -
disappears. A complete review of the regulatory situation for these instruments is 
therefore appropriate. 
4.9 Other issues 
There are a number of issues that will need further examination. Although some 
of them like conversion rates and settlement systems have been briefly 
considered, further analyses would be required. 
On conversion rates, the basic concern is to ensure a smooth transition and 
therefore it would be best to find a market friendly solution that used the markets 
rather than opposed them. Markets would need certainty that no volatility can 
occur at the end of the process because they would not be able to hedge. In order 
35 
to increase market stability, it is important to avoid the risk of markets guessing 
what will be the rule for fixing the conversion rates. It should therefore be clear 
that continuity is ensured and that political fixing is excluded. It is essential to 
maintain certainty on the legal framework and in particular that the one-to-one 
conversion from ECU to euro be retained. 
Markets consider that it would be a risk to leave the market to play without any 
additional guidance. Indeed, market rates of the last business day could have 
moved away from the long-term equilibrium level around which they would have 
been stable for two years, thus not reflecting economic fundamentals. Credibility 
would be the central question regarding the pre-announcement of conversion 
rates. If conversion rates were to be announced, the announced rates should be 
considered as reflecting economic fundamentals. 
On settlement systems, there is a need to further examine technical issues i.e. the 
handling of redenominated securities (decimals, different redenomination 
techniques), settlement in different currencies and cross-border settlement. 
Investors protection is another issue which requires more in depth examination. 
Investors protection is considered as one of the key factors of an efficient 
financial market. Moreover, it is a key factor for the international attractiveness 
of the market. 
36 
V. GLOSSARY 
Actual/Actual: a day count convention for the accrual of interest in which the 
calculation of interest is made based on actual number of days over which the interest 
is accrued and the actual number of days in the year. This is the preferred method for 
the bond market. 
Actual/360: a day count convention for the accrual of interest in which the calculation 
of interest is made based on actual number of days over which the interest is accrued 
and a 360-day year. This is the method proposed for the ESCB's money market 
operations. 
Business day for the euro: any day on which it is possible to trade, settle and make 
payments in euro. 
Central securities depository (CSD): a facility for holding securities and processing 
security transactions by book entry. 
Collateral: an asset pledge by a borrower to a lender for the duration of the loan. 
Generally, the amount of collateral held is calculated so that at no time is the lender 
exposed to market risk. If the borrower defaults then the collateral can be disposed of 
to pay off the loan. 
Coupon frequency: how often over a year the issuer promises to pay interest on a 
debt security (annually or semi-annually). Practice varies from country to country. 
Day count convention: the method for determining the number of days used to 
calculate the accrual of interest (see Actual/Actual and Actual/360 above). 
Dematerialised securities: securities that are held in non-paper form usually as 
electronic entries on a computerised accounting system. 
Euro area: the geographical area comprising of the Member States that have adopted 
the euro as their currency in accordance with the Treaty. 
Haircut: used in the securities industry to calculate the value of a security as 
collateral. The haircut varies according to the type of security, the market risk 
attached to it and the amount of time to maturity. 
Initial margin: amount of cash or eligible securities that has to be deposited before 
entering into a margining transaction. 
Issuer: legal entity which has the power to issue and distribute a security. 
Liquidity: the ability to buy or sell an asset quickly and without affecting the market 
value of the asset (i.e. to be able to convert to cash quickly). 
Marking-to-market: increasing or decreasing the price of a security in line with 
movements in the market value of the security. 
37 
Non Par Value Shares: shares which represent a fraction of the issued capital and do 
not have a nominal value. NPV shares are allowed by the second EC Company Law 
Directive and are widely used in Belgium and Luxembourg and in the US. 
Prudent man principle: a standard adopted by many authorities to guide those 
responsible for taking investment decisions on the behalf of others. In essence the 
decision taker is expected to act with discretion as a prudent man or woman would, 
that is to avoid speculative investment, to seek reasonable financial return and to 
preserve capital. 
Real-time gross settlement system: a gross settlement system in which processing 
and settlement operations take place continuously in real time. 
Redenomination: the change of the unit in which the amount of outstanding debt or 
equity is stated from a national currency unit to the euro unit, with no alteration of any 
other term. 
Renominalisation: the change in the nominal value of a bond or a share. 
Repurchase agreement (repo): agreement between a seller and a buyer in which the 
seller agrees to repurchase the sold security at a fixed price on an agreed date or over a 
specified period of time. 
Round lots size: the number of shares which can be traded and for which a price is 
given on an Exchange. The size of round lots is specific to each security and depends 
on the share price. 
Tap stock: is an issue of stock which has identical features to an outstanding normal 
issue. The tap stock is thus cqmpletely fungible withthe original outstanding issue. 
Tap stock issues are generally smaller than normal issues, and are aimed to respond to 
pockets of demand in the market for a particular stock. 
TARGET (Trans-European Automated Real-time Gross settlement Express 
Transfer system): a payment system consisting of one real-time gross settlement 
(RTGS) system in each of the Member States. The national RTGS systems will be 
interconnected through the Interlinking mechanism so as to allow same-day cross-
border transfers throughout the euro area. RTGS systems of "pre-in" Member States 
may also be connected to TARGET, provided they can process the euro. 
Tick sizes convention: rounding method of a share price for quotation purposes. 
Different tick sizes may apply to different ranges of prices. 
Variation margin: amount of cash or eligible securities that has to be deposited by 
the borrower to ensure that the counterparties remain fully collateralised throughout 
the term of a transaction. The amount of variation margin is determined by symmetric 
marking-to-market the collateral. 
38 
VI. ANNEX 
LIST OF EXPERTS ' 
Consultative Group on the Impact of the Introduction 
of the Euro on Capital Markets 
Group members 
Mr. A. 
Mr. M. 
Mr. G. 
Mr. Ch. 
Ms. G. 
Mr. 
Mr 
Mr. 
Mr. 
Mr. D. 
J. 
E. 
P. 
V. 
Mr. Th. 
Mr. S. 
Mr. F. Giovannini 
Beleza 
Bishop 
Bourdillon 
Evans 
Hoehn 
Moro 
Namor 
Praet 
Remay 
Richter 
Schuster 
Von Dewall LTCM 
Banco Comercial Portuguès 
Salomon Brothers International Ltd. 
Société des Bourses Françaises 
Bankers Trust/ISDA 
Paribas 
BBV Bruxelles 
San Paolo 
Générale Bank 
Paribas 
Deutsche Bôrse AG 
Deutsche Bank AG 
ING Group 
Other Participants 
Mr. D. 
Mrs C. 
Mr D. 
Mr. B. 
Mr. Th. 
Mrs. V. 
Mr J. 
Mr. M. 
Mr. W. 
Mr I. 
Mr R. 
Mr. J. 
Mr P. 
Mr. B. 
Mr. C. 
Mr S. 
Mr P. 
Mr P. 
Mr J. Angel 
Bennet 
Blake 
Blower 
Bollier 
Bourcier 
Bruen 
Chatfield 
Claeys 
Clarke 
Cocquyt 
Corrigan 
Cotella 
Crowe 
Dammers 
De Forges 
De Grauwe 
De Weerd 
Dowsett LIFFE 
Salomon Brothers International 
Goldman Sachs 
BBA - British Bankers' Association 
LTCM 
MATIF 
LIFFE 
LTCM 
Euroclear 
Morgan Stanley Int. 
CGER 
Irish National Treasury Management Agency 
/EFFAS 
Credito Italiano 
Chase Manhattan Bank/ISDA 
IPMA 
Trésor Français 
Katholieke Universiteit Leuven 
London Stock Exchange 
Dresdner Kleinwort Benson 
39 
Mr J-F 
Mr. M. 
Mr A. 
Mr. C.J. 
Mr. M. 
Ms C. 
Mr P. 
Mr J. 
Mr B. 
Mr J. 
Mr S. 
Mr . K. 
Mr R. 
Mr L. 
Mr. A. 
Mr Ch. 
Mr K. 
Mr 
Ms 
Mr 
Mr J. 
E. 
T. 
I. 
Mr G. 
Mr P. 
Mr P. 
Mr R. 
Mr M. 
Mr M. 
Mr C. 
Mr D. 
Mr Y. 
Mr. O. 
Mr K. 
Mr G. 
Mr. J. 
Mr N. 
Mr H. 
Mr P. 
Mr A. 
Mr M. 
Mr F. 
Mr. Th. 
Mr. A. Dubroeucq 
Elderfield 
Evans 
• Farrow 
Fox 
Franke 
Gennart 
Grant 
Greborn 
Hardt 
Harry 
Hoekerd 
Hoffman 
Horngren 
Houmann 
Huhne 
Knappe 
Knight 
Letemendia 
Mackie 
Mackintosh 
Mazzuchelli 
Mercier 
Mortimer-Lee 
Monro-Davies 
Obstfeld 
Papenfuss 
Parry 
Pepper 
Poullet 
Putzeys 
Reuss 
Rutzel 
S amain 
Schabel 
Style 
Tamayo 
Tohani 
van Turenhoudt 
Veverka 
Weisgerber 
Wigny Federation of European Stock Exchange 
ISDA 
LIBA 
> 
London Investment Banking Association 
Lehman Brothers 
Deutsche Bôrse AG 
Générale Bank 
Goldman Sachs 
VPC/The Swedish Central Securities 
European Mortgage Federation 
SICOVAM 
ING Group 
CEDEL 
Swedish Debt Office 
EBF 
IBCA 
German Banking Association - EBF 
Federation of European Stock Exchange 
EBF (European Banking Federation) 
European Mortgage Federation 
Standard & Poor's Ratings 
Morgan Stanley Int. 
European Monetary Institute 
Paribas 
IBCA 
University of California 
Deutscher Kassenverein 
Morgan Stanley Int. 
Goldman Sachs 
Euroclear 
Groupement européen des Caisses d'Epargne 
Standard & Poor's 
Bayerische Hypotheken und Wechsel Bank 
Générale Bank 
European Mortgage Federation 
IPMA 
BBV 
LIFFE 
Association belge des banques 
Standard & Poor's (France) 
German Banking Assoc. 
General Bank 
1. Experts participated in a personal capacity rather than as representatives of the respective institutions 
2. Chairman 
40 
ISSN 0254-1475 
COM(97) 337 final 
DOCUMENTS 
EN 09 02 
Catalogue number : CB-CO-97-345-EN-C 
ISBN 92-78-22411-1 
Office for Official Publications of the European Communities 
L-2985 Luxembourg 
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