The Madrid Summit of December 1995 gave powerful signals to the markets, drawing up the scenario for the introduction of the Euro, confirming 1 January 1999 as the starting point of stage 3 of EMU. Therefore, this year is really marking the beginning of the concrete preparation of European markets and operators to the introduction of the Single currency.
European financial markets are going to experience a new "big bang" within the next few years before the turn of the century. The introduction of the European passport as a result of the Investment Services Directive and the continued development of new technologies are further developing transfrontier transactions.
The introduction of the European single currency will strengthen this financial industry "revolution". In that context, European capital markets are facing many challenges : less products, more competition between financial intermediaries, exchanges and financial centers. But this new environment should also bring opportunities and French financial markets should take advantage of : - the participation of France in the European monetary union from the very beginning, - the attractiveness of a large, uniform and liquid European interest rate yield curve,
In order to develop Euro markets and products. like other European actors, French banks, intermediaries and markets have already initiated their "homework" in order : - to assess in detail the impact of the introduction of the Euro on the French financial markets, and especially on the MATIF, - to define a clear scenario of implementation, - and to concretely prepare the adaptation of the French capital markets and operators to this new environment.
As in most European countries, various working groups have been established in France to tackle the Euro changeover.
Since 1995, the Banque de France has implemented a steering committee in order to: - coordinate the preparation of the French banking community and to develop the synergy between domestic actors, - inform French market participants of the progress of the discussion between central banks, especially concerning the monetary policy to be implemented by the future European System of Central Banks, - anticipate problems and questions that should arise in the preparation before 1999 and during the transition period between 1999 and 2002, - decide which measures have to be taken in order to smooth the path for the single currency, - and to define a clear scenario of the introduction of the Euro within the French capital markets.
The Banque de France Steering Committee has been formed in order to tackle all the issues surrounding EMU. Five sub-committees are dealing with specific subjects :
- the first one is focusing on the monetary policy and refinancing tools, - the second one on the impact and adaptation of interest rates and currency markets, - the third one on the impact and adaptation of the Equity market, - the fourth one on legal questions (particularly sensitive for Financial markets), - and the last one on the retail banking activity.
These working groups have already drawn up a first scenario for the Paris market place changeover. The main objective is to convert a critical mass of market operations into Euro as of January 1, 1999. As decided during the Madrid Summit, the new Treasury debt will be issued in Euro starting from January 1,1999. Furthermore, the French Treasury announced that its outstanding debt denominated in FRF will be rapidly converted into Euro after France enters into Stage 3.
French gross settlement systems will work in Euro as of January 1,1999. All securities (including equities) will be quoted in Euro from the beginning of Stage 3. Thus, the French Banking Community will be able to offer a complete range of services in Euro from the beginning of Stage 3.
European financial markets will face accrued competition with the reduction of the number of domestic products. Facing this new challenge, the Paris market place and the MATIF have to concentrate their energy on a single objective: to attract the Euro business. In this process, Paris benefits from major advantages : - A competitive economy that will allow France to meet the entry criteria and therefore to participate to EMU from the very beginning. - A skilled financial labour force. - A large domestic customer basis with a competitive Unit Trust industry (the first one in terms of outstanding in Europe), large insurance companies and projects concerning the implementation of pension funds. - A competitive market organization including : . an efficient Treasury bond market with dynamic primary dealers and large outstanding and liquid issues alongside the yield curve (from the short term with TBills, to the long term with OATs), . a liquid monetary market with a secured repo market, . a modern infrastructure which from 1997 will include cash and securities delivery and settlement systems allowing real time processing (TBF) and collateralization (RGV) that should increase the market security. All gross settlement systems will be managed in Euro from January 1, 1999 and will be connected to TARGET. - The French implication on the ECU market.
Since April 1989, the French Treasury has been issuing securities denominated in Ecu. The French Treasury is not only the leading sovereign issuer in ECU but also the most regular borrower due to monthly issues. Primary dealers appointed by the French Treasury are committed to participate actively both in the primary and the secondary ECU market.
Since the beginning of the year, the French Treasury has issued 8 billion ECU of OAT and BTAN. Further, on the MATIF ECU bond contract, launched in October 1990, about 2,500 lots have been negociated daily since the beginning of the year with an open interest close to 9,000 lots at the beginning of September 1996.
Unfortunately, the ECU market has suffered from a severe crisis of confidence since 1992, illustrated by a decrease in the amount issued and consequently in the outstanding debt, and a structural lack of end-users. But with the uncertainties surrounding the Euro calendar being progressively removed, European portfolios should increase their interest on the ECU market that will benefit from a one for one conversion rate against the Euro.
For the MATIF, the preparation for the introduction of the single currency constitutes an absolute priority for the next coming months. For all derivatives markets, the main challenge will be to adapt their range of products and to fit into this new competitive environment.
A uniform yield curve will emerge with the introduction of the single currency : - A single monetary market. It should be noted that 1999 expiry months on short term interest rate futures contracts are a good indicator of the convergence after entry into Stage 3. Prices on March 99, June and September 1999 expiry months on the 3-month PIBOR and the Euromark are the same. - The economic convergence will lead to reduced interest rate differentials between sovereign issuers on the bond market. European bond markets have converged considerably over the last months. For example, the 10-year FRF yield spread to Germany have narrowed from 95 basis points to almost zero today.
As MATIF's volume today is largely concentrated on domestic interest rate products, this new environment will need adaptations in depth. The challenge for all European derivatives markets and especially for the MATIF will be to create the best market conditions in order to attract a critical mass of operators on their products and to rapidly develop the liquidity on the future Euro benchmarks.
To achieve this aim, the Euro is now considered as a key project. A project task force is now dedicated to this issue in order to design the scenario of the changeover for the MATIF. This internal task force will work together with the members to describe the best strategy to adapt MATIF products and systems through a committee of members dedicated to the single currency. This committee will render its first conclusions before the end of the year.
Concerning the adaptation of the interest rate products, the MATIF has already taken measures to ensure the continuity of the 3-month PIBOR contract. 1999 expiry months already listed will be settled against a 3-month Euro interest rate. The committee of member will have to analyze the possible complementary adjustments to be made on the contract before, and after 1999.
In the long term, our aim is to offer a Euro-denominated Treasury bond contract from the beginning of Stage 3 taking advantage of : - the liquidity of the FRF notional bond (150,000 lots a day since the beginning of the year), - and of the multi-issuers ECU bond contract which will be converted one for one in the Euro.
The rapid conversion of the French Treasury debt will provide the Notional underlying with a critical mass of Euro-denominated securities.
On the CAC 40 stock index contract, the adaptation wil be coordinated with the French Stock Exchange and the Equity option market (MONEP). The French Stock Exchange has already announced that equities will be quoted in Euro from the beginning of 1999.
Further, the quotation of commodity products listed on the Matif (sugar, potatoes rape seed and wheat) will be in Euro with a provisional parallel quotation in FRF or in DEM according to the products, if necessary.
It would be very difficult and certainly non cost-efficient for market operators, to maintain an activity on more than 20 derivatives exchanges within Europe due to the reduction in the number of domestic instruments.
The ability of the European derivatives markets and especially of the MATIF to attract the liquidity on the future Euro benchmark products, relies upon : - The liquidity of existing products. - The way the transition period will be managed. Until 1999, many ncertainties will remain and market behaviour should be influenced by speculations on the credibility and the irreversibility of the monetary union. In this uncertain environment, derivatives markets will need flexibility more than ever in order to seize any opportunity arising from the market. We have to keep a watchful eye on the evolution of the changeover scenario and on all the signals the market may send out. - The real implication of the membership in the changeover. - The offer of a full range of liquid Euro products as soon as the main uncertainties are removed (for example as soon as the list of the participating countries to Stage 3 of EMU is known). - A smooth transition from domestic contracts (in FRF for the MATIF) to Euro-denominated contracts.
As it is highly predictable that France will participate to EMU from 1999, and giving the existing liquidity on FRF interest rate contracts, it is obvious that the MATIF will play a main role in the future Euro interest rate curve.