European Matters: The Euro conversion weekend

Following days of intensive euro conversion and months of painstaking preparations for the changeover weekend, trading in the single currency became a reality on 3rd January 1999 (London time) with the opening of the Asian markets. Although the restructuring process has only just begun, the big leap to the single currency has been accomplished successfully.

Banks, securities firms, stock exchanges, custodians and fund managers were among those that were looking forward to the conversion weekend with critical optimism. Whilst dress rehearsals appeared to forecast a smooth changeover, the possibility of disruption and unexpected difficulties was never ruled out and contingency measures put in place. Fortunately, it turned out that there was no need to implement them.

The scenario

The conversion weekend was described by the FSA as referring to the 'conversion of the component currencies of European Economic and Monetary Union into their new euro values over the New Year bank holiday weekend'. This process largely involved the redenomination of securities. In addition, many other activities had to be undertaken such as:

• account conversions from XEU to EUR;
• ensuring the operation of all third party payment systems;
• providing adequate liquidity (preferably, more than normal) and collateral for 4th January 1999;
• transmitting euro quotations around branch networks and to operations centres; and
• amending documentation.

All tasks had to be performed within a limited timeframe lasting from close of business on 31st December 1998 to the opening of business on 4th January 1999. Effectively, some firms were even more constrained due to trading hours on the American market and the opening of Asian markets.

Determination of conversion rates

The starting-point for all conversion activities was the determination of the irrevocable euro conversion rates on 31st December 1998. Basically, the Commission calculated the final ECU exchange rate for the eleven participating legacy currencies on the basis of their central rates within the exchange rate mechanism (ERM). At 1340 hours, the Council, upon a proposal from the Commission and after receipt of an ECB Opinion, adopted the proposed Regulation on the conversion rates between the euro and the currencies of the Member States adopting the euro (Council Regulation (EC) No. 2866/98). On 1st January 1999 at 00.00 hours, this Regulation entered into force in each participating Member State.

The milestones

The actual conversion process was facilitated by recommendations for best practice which key market associations had put forward. The Securities Industry EMU Group, for instance, defined and recommended particular milestones and a timetable for their completion. It also encouraged Securities Depositories to make available on a frequent basis during the changeover weekend information about their progress in order to avoid major disruptions that might have arisen from interdependencies. Similarly, the Global Custodians' EMU Forum and IFMA had published recommendations for custodians and fund managers respectively.

Contingency measures

Moreover, all those involved in the conversion process could rely on a number of contingency plans which had been adopted in order to minimise the risk of failure. As a preventive measure, it was sought to keep the number of outstanding legacy currency deals as small as possible. National central banks and the ECB were prepared to closely monitor the conversion process and to be particularly vigilant in relation to core institutions the smooth transition of which is crucial for trading in euro and monetary policy. To that end, the Bank of England provided three contacts and the FSA asked regulated firms to contact the FSA in situations where the nature of the problem would be such that it may endanger the conduct of business as usual from the beginning of 4th January 1999. However, no incidents were reported. The conversion process went smoothly and many financial institutions managed to accomplish their tasks several hours ahead of schedule. TARGET, the settlement system for the euro which is linked to 15 national RTGS systems, started operating at 7 a.m. C.E.T. on 4th January 1999.

The outstanding success of the euro conversion weekend was largely due to thorough preparations and real-time dress rehearsals which allowed all participants to simulate their conversion activities and to test the operation of their infrastructure and IT systems.

Outlook

Close to the beginning of the next millennium European integration has become much more real, with eleven Member States being joined together in a single currency area. Liquidity in European bond and equity markets is expected to improve and, hopefully, the wider implications will involve Europe's economic well-being. Furthermore, the market perception is that the euro will rival the US dollar in terms of trading volume and as a reserve currency. This will bring about significant changes in world financial markets. In the meantime, market participants need to familiarise themselves with new prices, reference rates and exchange rates.

Leaving the euro conversion weekend behind, efforts will now increasingly focus on the resolution of the technical, commercial, legal and regulatory implications of the millennium bug. Again, the risk inherent in every insufficient or inadequate resolution of the Y2K problem is that of a systemic knock-on effect. Initiatives on both a national and international level have already been taken and will be reinforced in the run-up to the new millennium. It remains to be seen how this transition will be accomplished but if it is as successful as the Euro conversion then the City will breath a sigh of relief. Thorough preparations and rehearsals will again be the key.