Opinion of the Economic and Social Committee on the 'Communication from the Commission "The impact of the introduction of the euro on capital markets"` (98/C 73/32)

On 4 July 1997 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 5 December 1997. The rapporteur was Mr Robert Pelletier.

At its 350th plenary session of 10 and 11 December 1997 (meeting of 10 December) the Economic and Social Committee adopted the following opinion by 106 votes to 4 with 10 abstentions.

The communication submitted for the Committee opinion is the result of the work of a group of experts chaired by Mr A. Giovannini. It sets out technical recommendations on the redenomination of the bond, equity and derivative markets and on the market conventions which should be applied to the new euro capital market.

1. General comments

1.1. The importance of market conventions, i.e. self-regulation by professionals, should be stressed. This is why the Commission has wisely decided to rely to a great extent on expert opinion.

1.1.1. The approach adopted by the Commission is in response to the markets' expressed preference for recommendations rather than a regulation. The experts from the various Member States have drawn up a series of technical recommendations summarizing the views of operators on the degree of harmonization needed for the establishment of a euro capital market which will be as liquid and as transparent as possible.

1.2. The approach is pragmatic and progressive and takes account of the different practices, conventions and national standards which still apply in the domestic markets and some of which will necessarily continue after 4 January 1999.

1.2.1. In this respect the Commission is to be congratulated for having conducted numerous consultations with professional organizations representing market operators.

1.3. The consultations carried out by the Economic and Social Committee have in most cases confirmed the line taken by the Commission. This confirms that market operators have an international and common view of the operation of the markets for bonds, fixed-interest, equities, derivatives etc.

1.4. In view of the many technical questions tackled by the Commission's communication and in order to avoid making the opinion too long, the Economic and Social Committee has decided to address only questions to which it can bring 'added value`. If a problem has not been mentioned, this implies that the Committee endorses the solution adopted by the Commission.

1.5. The Commission communication clearly explains the very complex processes involved in introducing the euro on capital markets. The Economic and Social Committee congratulates the Commission on having placed this aspect of monetary union in a more general perspective in its recent communication () on the practical aspects of introduction of the euro.

1.6. The latter document is a fitting complement to the communication currently under discussion, in that it addresses various legal problems connected with the euro, tax, accounting etc.

2. Specific comments

2.1. The bond market

2.1.1. In December 1995 the Madrid European Council decided that from the start of stage three of EMU all new tradable public debt would be issued in euros. This was a precondition for the adoption of the euro by the financial markets on 4 January 1999. This decision was not in itself sufficient however. The main countries have since announced that they would also convert a significant part of their outstanding debt into euros after this date, thus creating a critical mass likely to guarantee the liquidity of the markets and a benchmark yield curve for euro interest rates. To date France and Belgium have confirmed that they will convert their public debt into euros. Germany adopted a draft law in the Council of Ministers on 24 September 1997 enabling DM 730 billion to be denominated in euros. This would provide optimum conditions for the operation of the repo and derivative markets, with a solid foundation of euro-denominated securities.

2.1.2. In some Member States however certain issues of government debt made available to the general public will continue to be denominated in the national currency.

2.1.3. In most Member States therefore the liquidity, transparency and efficiency of the government bond market will be enhanced by the quotation and settlement of negotiable debt instruments and bonds in euros. The conversion of negotiable public debt is certain to be followed by that of major corporate bonds. Less liquid and smaller issues will however remain denominated in the national currency until their maturity.

THE MAIN CONVERSION METHODS

2.1.4. The fact that conversion to the euro will not yield a round number will pose considerable problems of adaptation for firms, individuals and markets. It is for example difficult to envisage securities with a nominal value containing two figures after the decimal point. This kind of amount will not make it easier for physical persons to conduct market transactions. Many countries will therefore, after conversion to the nearest cent, have to round up to units of 1 euro, 10 euros or 100 euros.

2.1.5. The Economic and Social Committee therefore considers that the method of rounding to the nearest cent could be used for the redenomination of negotiable debt; another possibility would be renominalization with the payment of compensation. Both methods have their advantages.

2.1.5.1. National measures should however be taken to prevent bond-holders from being penalized in the area of taxation.

2.1.6. Redenomination on the basis of individual bonds

A bond with a national currency unit value of 2 000 could be redenominated, in the case of France for example, as a bond with a value of euro 312,60, i.e. 2 000/6,39795 (conversion factor to five decimal places) rounded to the nearest cent.

One consequence of this operation is that the amount of outstanding debt in euros would not be a whole number.

2.1.7. Redenomination on the basis of a fixed minimum denomination with cash compensatory payments

To take a French example again, a bond with a national currency unit value of 2 000 is converted into 312 bonds with a nominal value of euro 1, i.e. 2 000/6,39795 (conversion factor to five decimal places) with the payment of cash compensation of 60 cents. The result of this operation is that the amount of outstanding debt in euros would be a whole number, which would enhance liquidity and make it easier for the public to understand the conversion.

The securities would then be quoted in multiples of euro 1 (100, 1 000 etc.) and negotiated on the basis of a capital amount in multiples of euro 1.

2.1.8. Whatever method is chosen, it will entail rounding. There are four 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.

2.1.9. The preferred method of the group is the bottom-up method. One of the advantages of this method is that there is no change in the value of an issue and that the risk of rounding errors is reduced as each individual holding is converted. Contrary to what the communication suggests, redenomination on the basis of a fixed minimum denomination with cash compensatory payments is a bottom-up method. This analysis should be corrected in the communication.

2.1.10. The three other methods described in the report are as far as we know the least used.

2.1.11. The survey carried out by the European Banking Federation confirms that the Member States are in the process of adopting the detailed methods for the conversion of government debt. It is essential that the Commission collect technical information, the accuracy of which has been confirmed by each of the Member States, and disseminate this widely.

2.2. Market conventions

2.2.1. Market conventions need to be harmonized in order to increase efficiency and transparency.

2.2.2. The main conventions concern:

- day counts

- coupon frequency

- business days

- euro settlement basis.

The professional associations representing these markets have defined market conventions which command a broad consensus and which will rapidly become points of reference for the single market.

2.2.3. The recommendations put forward by the communication on these various points are welcome but will, for example in the case of business days, require national legislation. Moreover, the communication rightly points out that harmonization will generate costs and cause delays.

2.3. The equity markets

2.3.1. These markets are more sensitive in that they display greater diversity from one Member State to another than the fixed-interest markets. They concern a large number of small savers who have invested in securities either directly or via collective investment vehicles.

2.3.2. However, the basic assumption is that a single currency will be used for quotations, for legal reasons, but also in the interests of simplicity and public comprehension.

2.3.3. It should be made easier for companies to redenominate their shares in euros. This will no doubt depend more on the development of euro accounting than on quotation in euros. It would however be desirable for the conversion of share capital into euros to be done in as flexible a way as possible. National legislation could be enacted to enable boards of directors to decide, if they so wish, to convert their company's share capital into euros, without the need to convene a general meeting of shareholders.

2.3.4. A company wishing to redenominate its shares in euros has four options:

- to leave shares indefinitely with a par value of unrounded euros;

- to convert the share par value rounding to the nearest cent;

- to change the par value to a round number of euros and have a common nominal value;

- to move to non par value shares.

2.3.4.1. In view of the diversity of the laws governing changes in share capital, a recommendation conferring powers on general meetings of shareholders or boards of directors in this regard would be welcome.

2.3.5. The Economic and Social Committee would like to see the introduction of non par value shares encouraged. Legislation in this field is in progress in each of the Member States and this should be encouraged.

2.3.6. In its general considerations on the equity markets the Commission rightly notes that 'issuers tend to focus mainly on their national share market`.

2.3.7. On the other hand, the assertion that 'the introduction of the single currency and the disappearance of exchange rate risk in the euro area will not, at least in the short term, modify the existing relation between issuers and their domestic markets` should be qualified.

2.3.8. Independently of the effort to increase competition made via the investment services directive, the consequences should not be underestimated of opening up a large euro market with international issuance standards and tougher requirements on issuers with regard to quotation, lodging of accounts, profitability ratios, advertising of issues; these will have the effect of driving from the market medium-sized companies unable to withstand the competition from large companies in the euro market, thus losing their traditional access to the national market.

2.3.9. The impact of the internationalization of the euro market on conditions for the financing of small and medium-sized European enterprises merits more detailed study by the competent authorities.

2.4. The derivative markets

2.4.1. The main problem here is continuity of contract. The adoption of two Council regulations on the introduction of the euro () will help establish a solid legal basis for the start of the third stage. Some countries, e.g. the USA, have legislated in this area.

2.4.2. The Committee welcomes the legal analyses undertaken by the Commission which confirm that by virtue of the 'lex monetae` a legal principle recognized on all major financial markets, the continuity of contracts expressed in currencies replaced by the euro should also be guaranteed in non-member countries. This analysis remains however to be confirmed in some smaller countries.

2.4.3. It would be a good idea for the Commission to undertake a large-scale communication campaign to inform non-EU countries as to the real nature of these problems so as to prevent commercial misunderstandings.

2.5. Price sources

2.5.1. Several national panels are in the process of constructing market price indicators. Eventually, with the introduction of the euro, price sources in national currencies will disappear.

2.5.2. The associations representing credit institutions and market operators have created a EURIBOR. Similarly, the European Monetary Institute has agreed to calculate a EURIMEAN which would be disseminated via the European Banking Federation. All the professional organizations representing credit institutions are involved in the setting up of panels representative of price sources.

2.5.3. The principle of creating new price sources for the euro zone based on a sample of banks representative of the zone will provide a European benchmark for new contracts from 1999 onwards. It would be a good thing for domestic price sources to disappear in Member States where national law allows this or, if they continue, for them not to be widely publicized. This is a precondition for the creation of a single financial market.

2.5.4. The principle of continuity of contract does not mean that existing price sources should continue to apply after 4 January 1999 providing that there is a new price source close to the old one which can be substituted.

2.6. Reserve requirements ()

2.6.1. Considerable efforts are being made to ensure that the capital markets are efficient. The imposition of reserve requirements would totally compromise the establishment of a unified euro capital market.

2.6.2. The Economic and Social Committee must point out the risk, if this were done, of business moving to euro markets not subject to reserve requirements. It is particularly worrying that the establishment of a single financial market in euros should be penalized and that for regulatory reasons the euro market should have to develop outside the countries participating in economic and monetary union.

2.7. Tax

2.7.1. The Economic and Social Committee shares the Commission's view that 'regardless of the level of harmonization achieved in terms of market conventions and practices there will still be distortions resulting from differences in national tax regimes`.

2.7.2. However, the Economic and Social Committee does not consider it possible to wait until the introduction of the euro has created a general awareness of the distortions to seek a solution to a situation which has become unacceptable in terms of competition.

2.7.2.1. Accordingly, the Economic and Social Committee stresses the significance of the measures recently proposed by the Commission which will inter alia produce a code of conduct designed to prevent harmful competition in the area of taxation.

3. Conclusion

3.1. The Economic and Social Committee would like to highlight the quality of the communication referred for its opinion. It hopes that the Commission will in future continue to be guided by the desire to keep abreast of the concerns of market operators, rather than imposing rules which in all likelihood would lag behind the practices of the professionals.

3.1.1. The initiatives taken by the representative professional associations demonstrate their ability to carry out the harmonization of professional rules necessary for the development of a transparent and liquid financial market for the euro.

3.2. The Economic and Social Committee stresses the need to monitor, almost on a day-to-day basis, the development of market practices, which are constantly changing.

3.3. Drawing on its members' know-how, the Economic and Social Committee could provide the Commission with detailed technical assistance on problems related to the introduction of the euro on the markets which remain to be resolved. The Committee would like to be involved throughout the process of introducing the euro.

Brussels, 10 December 1997.

The President of the Economic and Social Committee

Tom JENKINS

() COM(97) 491, 1.10.1997. See also ESC opinion on this communication.

() Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro (adopted on the basis of Article 235 of the Treaty), OJ L 162, 19.6.1997.

Proposal for a Council Regulation on the introduction of the euro (approved by the Council on 7 July 1997; the regulation will be adopted on the basis of Article 109l(4) of the Treaty as soon as the decision as to the Member States adopting the euro has been taken) OJ C 236, 2.8.1997.

() See also opinion of the Economic and Social Committee of 24 March 1993 on minimum reserves in the context of the internal market (rapporteur: Mr Meyer-Horn), OJ C 129, 10.5.1993, p. 10.