Adapting to a New Era
Serving the euro capital markets: an ICSD’s perspective.


Pierre Slechten

The move to the single European currency will bring unprecedented challenges for all layers of the financial industry. It is clear that the advent of the euro is not just a European issue: it will affect any entity holding or trading securities denominated in EMU-eligible currencies, whatever its country of residence. Nobody can afford to miss the multiple opportunities to be presented by the euro. However, preparing for the single European currency implies getting ready for its many facets of change, whether it be securities redenomination, cash, collateral management, or the major systems interventions involved.


Beyond securities redenomination and infrastructure preparations, other challenges will emerge with the launch of EMU. The disappearance of foreign exchange risks as well as the convergence of interest rates associated with the upcoming single monetary policy will lead to less volatility and, as a consequence, the market will be presented with fewer arbitrage opportunities. European Governments will borrow less and continue to privatize state-owned enterprises. As a consequence, the private sector will be increasingly financed by the savings traditionally invested in public debt.

Indeed, more and more corporate issuers will look to the corporate bond and equity capital markets for their financing needs. The shift to bond and equity financing by corporate issuers will correspond to increased demand from privatized retirement schemes for an aging population, resulting in lower financing costs to these issuers. Furthermore, investors will begin to look at investing against risk on a given sector, such as consumer products, or financial services, for example, and increasingly will be taking credit risk rather than investing against currency movements. This means we will see an growth in the corporate bond and equity issuance, while investment increasingly will be done on a cross-border basis to take advantage of the benefits of portfolio diversification.


The euro will be introduced on January 1, 1999, the moment the conversion rates between national currencies of EMU Member States and the euro will be irrevocably fixed. These national currencies will continue to exist as denominations of the euro. Therefore, financial services will need to allow market participants to work in the various denominations of the euro during a three-year transition period, extending from January 1, 1999 until the end of 2001. This means that infrastructure adaptations will be needed to accommodate this cohabitation between the euro and the EMU national currencies. However, it’s for a relatively short period of time.

For systems designers, probably the biggest challenge arising from the introduction of the single European currency is the assumption that, depending on the issuer’s choice, nominal amounts of securities will contain decimals after redenomination. This will have a huge impact on existing securities databases, computer programs, and information flows. However, to say that decimals in nominal amounts of securities will be the only change to address, would be an understatement, because the consequences of the introduction of the euro are far reaching. The few examples below demonstrate the scope of systems and operational implications with which financial market professionals must deal, all of which will require close monitoring and active collaboration among all intermediaries involved.


As the primary central international securities depositary for internationally traded securities,

the Euroclear System will be broadly impacted by EMU, as well as its Participants, and their clients. All EMU-eligible currencies are denomination currencies for securities in the Euroclear System. Exhibit 1 shows the number of domestic European Government bonds likely to be simultaneously redenominated on January 1, 1999 that are currently held in the Euroclear System. The exhibit also shows the number of corporate and supranational debt issues held in the Euroclear System that will probably be redenominated once the process of Government bond redenomination has been completed. As you know, Denmark, Greece, Sweden, and the United Kingdom will not be part of EMU at its start.

Exhibit 1: Number of issues held in the Euroclear System
  Domestic Government debt Corporate and supranational debt
Total 1,165 21,079


The emphasis during the entire Euroclear transition process to the euro has been, and will continue to be to make it as efficient as possible for Euroclear clients. Toward that end, three principles are observed.


It will be the security issuer’s decision if, when, and how its are to be redenominated. This may happen through either book-entry nominal conversion for dematerialized securities and issues represented by global certificates, or through an exchange of physical certificates. The majority of the affected securities in the Euroclear System are in dematerialized form, which increases the likelihood of their redenomination.

An issuer may decide to redenominate its securities into a new nominal amount expressed in euro, either with or without decimals. In the second case, the issuer will have to compensate the nominal fraction in cash which is, for example, the case in France. Moreover, depending on the issuer’s choice, the redenomination process can be based on the Euroclear Participant’s securities balance or on the security’s minimum denomination. The first choice will result in the previously mentioned rounding discrepancies, while the second one will have an impact on the size of the issue.

As already mentioned, these various possibilities or options will be accommodated in the Euroclear System.

The markets that will be part of EMU have revealed details about their intended methods to redenominate Government bonds. Exhibit 2 gives an overview of the information currently available.

Exibit 2 Local market transition summary

Redenomination parameters
Country Instrument New ISIN code Redenomination date Redenomination method Redenomination basis New minimum denomination Renominalization rounding rules Cash compensation Intermediate rounding rules 
Austria Most liquid governnent bonds No 04/01/1999 Book-entry Minimum denomination EUR 0.01 = 
1 cent
Standard rounding No N/A
Belgium T-Bills OLOs No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
Finland All government bonds in book-entry form No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
France T-Bills Government bonds Semi-government  
bonds (cades)  
Yes 04/01/1999 Book-entry Securities holding EUR 1 
See definitions
Round down Yes 
See definitions
See definitions
Germany Most liquid government bonds 
Most Jumbo-Pfandbriefe
No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
Ireland All government bonds No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
Italy All negotiable government bonds No 04/01/1999 Book-entry Minimum denomination EUR 0.01 = 
1 cent
Standard rounding No N/A
Luxembourg OLUX No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
The Netherlands All government bonds Yes 04/01/1999 Book-entry Securities holding EUR 1 Round-up 
See definitions
No N/A
Portugal Most government bonds No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
Spain All tradable T-Bills and government bonds No 04/01/1999 Book-entry Securities holding EUR 0.01 = 
1 cent
Standard rounding No N/A
For definitions and important notes, please see p2.
Denmark, Greece, Sweden, and the United Kingdom will not immediately be part of EMU as from January 1, 1999.
This is a summary provided for information purposes only. The information reproduced herein has not been independently verified by Morgan Guaranty Brussels and is subject to changes in each local market.
Morgan Guaranty Brussels, as operator of the Euroclear System, accepts no liability for the inaccuracy or incompleteness thereof.
© 1998 Morgan Guaranty Trust Company of New York


Definitions and important notes

Please note that all countries shown in the table have announced that they will apply a Big Bang approach, i.e. only the euro will be accepted as a cash settlement currency.


In France, OAT-stripped coupons in FRF and XEU have been added as a market selection option in the ‘Euroclear sEMUlator ™ ’.

 New minimum denomination

Defines the new minimum denomination of a security (e.g. 0.01 euro, 1 euro, ...). It may also be assimilated to the new multiple tradable amount. In France, for example, the new minimum denomination is EUR 1, except for OAT-stripped coupons, which will be EUR 0.25.

 Renominalization rounding rules

The renominalization rounding rules applied to the redenominated security. This specifies how redenominated securities holdings or redenominated minimum denomination must be rounded to the nearest new minimum denomination. In the Netherlands, NECIGEF will round down to the closest euro while the Dutch banks have decided to round up to the closest euro. The Amsterdam Exchange has called on other participants to also round up positions.

 Cash compensation

Indicates if cash compensation is applied to fractional portions of redenominated securities. In general, the amount of the cash compensation is determined by multiplying the nominal fraction with the cash compensation quotation given by the issuer. From this amount, the cash compensation withholding tax, if any, is deducted. In France, a so-called ‘gross amount’ will be multiplied by the most recent financial quotation of the security to obtain a so-called ‘net amount’, which will be subject to standard rounding. In France, no tax will be due on the cash compensation at the time of the security’s redenomination nor at the time of the cash compensation distribution. Only when the redenominated security is sold will the cash compensation become taxable as a capital gain. Tax will be due if the Beneficial Owner is resident in France. Non-residents will be exempt.

 Intermediate rounding rules, applied in case of cash compensation

Facilitates calculation of the redenomination basis in euro equivalent, which is needed to calculate the nominal fraction to compensate. The redenomination basis divided by the conversion rate is rounded according to the intermediate rounding rule indicated. The first character indicates the rounding rule, the second character indicates the number of decimals to keep, and the third character indicates whether or not cash compensation is applicable, and at which level it is applied. In France, D5H stands for rounding down to five decimals, with cash compensation calculated at the securities holding level. The so-called ‘gross amount’, which is the decimal part of the redenominated amount, will be truncated after the fifth decimal.





When Euroclear-eligible securities are to be redenominated according to a book-entry nominal conversion, a Euroclear-specific redenomination life cycle will be followed consisting of the following steps:

1. Information provision

In the so-called Euroclear redenomination life cycle, specific redenomination information will be collected such as the redenomination date, method and basis, new ISIN codes, rounding rules, cash compensation rules, and more. Since September 1998, Euroclear clients regularly receive ‘The Securities Redenomination Information Report’, which is a list of securities that will be redenominated, including specific redenomination information details. It is available on communications channels, such as the Euroclear web-site (, CD-ROM, and a paper-based publication. As a complement to this report, a new redenomination simulation tool called the ‘Euroclear sEMUlator IIä ’ allows users to collect securities redenomination information and to simulate redenomination of securities directly selected from the report. The sEMUlator II is also available on the Euroclear web-site and CD-ROM.

As such, Euroclear Participants will be able to update their own databases in order to communicate this information to their clients on a timely basis. In turn, their clients can synchronize their systems with the new information.

2. Processing of redenomination

Issuers’ decisions to redenominate will be accommodated. If, for example, an issuer decides to redenominate its securities into a new nominal amount expressed in euro with decimals, the Euroclear System will accommodate decimals in nominal amounts up to two decimal places. If an issuer decides to redenominate its securities into a new nominal amount expressed in euro without decimals, the System will process the issuer’s cash compensation for the nominal fractions, provided these are equal to one euro or above.

3. Reporting of execution

Movements related to balances conversion, and cancellation and replacement of pending instructions, will be reported through the usual Euroclear reports, with specific redenomination narratives, which will facilitate reconciliation after redenomination.


After months of consultations and internal preparations, counterparts within the securities industry are now ready to test and compare the results of their conversion programs. Using a number of initiatives, Euroclear is working to provide its clients with all the information necessary to ultimately reconcile the trades/positions that Euroclear will convert for its clients during the ‘conversion weekend’.

Starting in mid-October 1998, Euroclear euro-transition testing facilities will enable clients to compare the results of their own simulated redenomination processes with those simulated at the Euroclear Operations Centre in Brussels. Furthermore, changes to instruction input formats and validation rules may be tested, as well as the report formats to be used in the new euro environment.

August 31, 1998 was selected as the Euroclear euro testing reference date. This is in common with a decision taken by the securities industry’s EMU group. On the evening of August 31, a snapshot of all client positions and transactions was saved, and the simulation of the redenomination process of securities balances and pending trades initiated, just as if it were the first weekend of 1999. Those participating in the test (i.e. fund managers, custodians, brokers) also recorded their transaction data on August 31, in order to simulate redenomination and facilitate comparison with the testing results provided by Euroclear. After several weeks of simulated data preparation and quality checks, the results will be available from mid-October till the end of December, allowing for a comprehensive redenomination testing period.

Reports in the testing environment will become available in two phases, both to remain available until and including December 31, 1998:


The Euroclear Securities Redenomination Information Report, available since September 1998, lists the securities that will be redenominated into euro within the Euroclear System during the first weekend of 1999 and thereafter. This report provides vital information for implementing euro-transition practicalities, enabling Euroclear clients to search, security-by-security, if, when, and how redenomination will be applicable. Updates of the Report will depend on the receipt of updated information from the issuers. Daily updates are foreseen through the Euroclear website. The Report will be made available to clients even after the first weekend of 1999.

A ‘Euroclear sEMUlator II ’ has been provided together with the Report. It allows the user to simulate redenomination, security-by-security, for an individual holding or a range of positions held in the selected security. This is the first redenomination tool permitting a selection of individual securities that will be subject to redenomination to simulate redenomination results. The ‘Euroclear sEMUlator II ’ can also be used by Euroclear clients to simulate redenomination results of securities that are used in the euro-transition testing environment.


Euroclear Participants are strongly encouraged to settle in euro at the start of the transition period on January 1, 1999.

As the Euroclear System offers multicurrency settlement, both parties to a trade can agree to settle their transactions in a wide choice of settlement currencies, which may be the euro, the local EMU currency, or any other Euroclear settlement currency. There will be room for flexibility, provided both counterparties of the transaction agree on and input the same settlement currency in these situations.

Where one of the counterparties is a local market participant, local market decisions will be accommodated. In all EMU markets, the local CSDs will take a "Big Bang" approach (ie, allowing settlement in euro only as from January 1, 1999). As a result, the euro must be used as the settlement currency.


The Euroclear System is uniquely positioned as the premier cross-border hub for the new EMU environment. The Euroclear System already serves as the single access point for the most actively traded European government debt securities. Ensuring an efficient move to the euro will have a positive impact on the number of issues denominated in EMU currencies held or settled through the Euroclear System. With our systems developments underway to accommodate the euro and its various implications, we are confident of being ready for the first euro trade. With the provision of Euroclear testing facilities and detailed redenomination and other EMU-related information, every effort to provide its clients with the necessary tools to test, cross-check, and increase confidence in their own conversion weekend preparations.