91997E3608

WRITTEN QUESTION E-3608/97 by José García-Margallo y Marfil (PPE) to the Commission (13 November 1997)

Subject: Commission communication on the impact of the introduction of the euro on capital markets (COM(97) 0337)

On the subject of fixed capital markets, one of the possibilities suggested in this document for redenomination of existing debt would be to work on the basis of a fixed minimum denomination with cash compensatory payments (the 'top-down' method).

The document states that one drawback of compensatory payment - an essential part of a 'top-down' redenomination - is the variations in the cash flow generated by coupon payments and in the maturity value of the bond.

Can the Commission explain, in general terms, why it considers such variations would be harmful?

Joint answer to Written Questions E-3607/97 and E-3608/97 given by Mr de Silguy on behalf of the Commission (13 February 1998)

In the Commission communication on the impact of the introduction of the euro on capital markets ((COM(97) 337 final. )), a number of methods for the redenomination of debt are examined. The two main methods examined are called 'top-down' and 'bottom-up'. The communication expresses a preference for the 'bottom-up' method. According to this method, redenomination would not alter the total volume of securities issued and the potential for rounding differences would be reduced to insignificant amounts.

According to the 'top down' approach the original issue is broken down into a number of 'pieces' with identical minimum denominations. Each of these minimum denominations is redenominated using the conversion factor and rounded to the nearest cent. The new total amount of the issue is then calculated by multiplying the minimum denomination in euro by the number of 'pieces'. This new total is likely to be different, because of rounding differences, from the direct conversion of the total amount of the issue. The difference would have to be accounted for through compensatory payments.

The compensatory payments would be necessary to avoid the possibility of artificially generating or destroying stock. This cash payment would expose either the issuer or the investor to reinvestment risk. As a consequence of such compensatory payments, the cash flow generated by coupon payments and in the maturity value of the bond would be slightly modified. This could have implications for the related derivative instruments since the hedges set up prior to redenomination are based on the exact expected cash flows generated by coupon payments and in the maturity value. If such cash flows are modified, even if the amounts are very small, they would no longer correspond to the related derivatives operations. If a 'top down' approach is chosen, it should be implemented in a way to avoid the potential problems. However, as mentioned above, the potential disruption would only appear in case of outstanding derivative contracts related to the denominated bond.

Detailed examples to illustrate the 'top down' method are included in the Commission communication (page 12 of the English version).