Opinion of the Economic and Social Committee on the 'Communication from the Commission "The impact of the introduction of the euro on capital markets"'
Date: 1997-12-10
Institutions: European Economic and Social Committee
Subjects: capital market, euro, financial market, monetary cooperation, monetary policy

9.3.98

EN

Official Journal of the European Communities

C 73/141

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 opin-
ion 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

The importance of market conventions,

1.1.
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.

In this respect the Commission is to be con-
1.2.1.
gratulated 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.

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.

communication

The Commission

1.5.
clearly
explains the very complex processes involved in introdu-
cing 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 (1) 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.

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

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

communication.

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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.

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.

2.1.3.
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

The fact that conversion to the euro will not
2.1.4.
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. R e d e n o m i n a t i o n o n t h e b a s i s o f

i n d i v i d u a l b o n d s

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. R e d e n o m i n a t i o n o n t h e b a s i s o f
a
f i x e d m i n i m u m d e n o m i n a t i o n
w i t h c a s h c o m p e n s a t o r y p a y m e n t s

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.

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.
report are as far as we know the least used.

The three other methods described in the

The survey carried out by the European
2.1.11.
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

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legislation. Moreover,

national
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.
in euros has four options:

A company wishing to redenominate its shares

— 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;

2.3.8.
Independently of the effort to increase compe-
tition 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.

The impact of the internationalization of the
2.3.9.
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

The main problem here is continuity of con-
2.4.1.
tract. The adoption of two Council regulations on the
introduction of the euro (1) 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 misunder-
standings.

— to move to non par value shares.

2.5. Price sources

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.

2.5.1.
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.

2.3.5.
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.

2.5.2.
insti-
The associations representing credit
tutions and market operators have created a EURIBOR.
Similarly, the European Monetary Institute has agreed

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.

(1) 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.

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to calculate a EURIMEAN which would be disseminated
via the European Banking Federation. All the pro-
fessional 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
they
States where national
continue, for them not to be widely publicized. This is
a precondition for the creation of a single financial
market.

law allows this or,

if

The principle of continuity of contract does
2.5.4.
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 (1)

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.

(1) 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.

Brussels, 10 December 1997.

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 Com-
mittee 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

The Economic and Social Committee would like
3.1.
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 necess-
ary 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 Econ-
omic and Social Committee could provide the Com-
mission 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.

The President

of the Economic and Social Committee

Tom JENKINS