Very informative - "A Dress Rehearsal Before The Curtain Goes Up"
(for personal use)
The move to a single currency in 11 European countries from next January is one of the most formidable information technology problems ever to confront the world.
Although its implications have been overshadowed by the fears over the so-callled millennium "bomb" - the computer date problem - the euro's potential impact reaches far beyond the highly specialised world of investment banking and complex financial instruments. In the event of a significant failure, anyone with small investments - or even a pension or an endowment insurance policy - could be affected by the impact.
While Europe's retail banks have three years' grace before the euro hits the streets in the form of coins and notes - although they still have to be ready from day one - investment banks are in the front line from next January.
Because of the global nature of investment banking, it does not matter that the institutions are outside the euro area.
Many leading investment banks are based in London, or have sizable operations there, and they are taking the euro as seriously as any of their rivals in the member countries - despite Britain's decision to remain aloof from the single currency for the time being.
Stories of London hotel rooms being fully booked over the New Year period and of extraordinary preemptive actions by financial organisations are common.
"One of our City clients has flown in a hundred accountants from the Far East to cover them over the New Year period," says Paul Cantwell, who is a partner in the financial services business of Andersen Consulting. "They are currently being trained to cope with the potential paper backlog after January 1.
"No practically-minded person will assume that the introduction of the euro will all go right - so they are looking at contingency plans. We are working with half a dozen investment banks at the moment to ensure that they are ready in 1999."
'The Euro and Your Business,' a report prepared this year by Arthur Andersen, Andersen Consulting's sister accountancy firm, shows significant lack of coherence in preparations for the euro. Banks across Europe are at different stages and have different policies regarding the mechanisms of currency exchange and charges.
Not surprisingly, French and German banks are the most advanced and aim to offer the greatest flexibility in terms of accounts and payments in the euro from January 1, 1999. The remaining nine countries in the euro zone are also well advanced. Spain, for example, has decided to operate its financial and capital markets exclusively in the euro from the start of next year.
Those leading countries that have opted out - Denmark, Sweden and the UK also appear to be prepared.
"There is a lack of coherence - partly because there is no central forum for co-ordinating the change. The European Central Bank has defined the rules and policy guidelines - but it is really far too complex for one group to try and govern," says Mr. Cantwell.
He says that the introduction of the euro is the "largest single change in the international financial markets" since the 'big bang' in the 1980s when London financial institutions were deregulated.
"There is no clear precedent for what will happen because nothing like the euro has ever been done before. If they are not into testing their systems by now, then they will be too late. The big players are all now into what might be called a dress rehearsal checking how their systems will cope after January."
Others confirm this. "The general consensus if that the major institutions are ready and going through final testing now - so I don't think there will be a major meltdown in January," says Alec Nacamuli, head of payment systems at IBM's Consulting Group. "But there is certainly a worry about the smaller banks. All the financial institutions are going to have to spend a lot of time and money over the next few months preparing, strengthening help desks and putting new systems in place."
While the larger financial institutions seem sufficiently well prepared to face up to the changes the euro will bring, Andersen Consulting's Mr. Cantwell is also concerned that smaller organisations will not be ready in time.
"The financial system is like a spider's web where everything is joined together - and as we all know the strength of any system depends upon its weakest link. It is obvious that if Euroclear or S.W.I.F.T. (the clearing and financial message systems) failed, then it would cripple the financial systems."
"But the same holds true for the smaller organisations. Every institution relies upon many suppliers and service providers. If they are not ready, then it is bound to affect the whole system."
Mr. Cantwell is also concerned that some non-European banking systems will not be geared up for the euro in time. "This will be of some significance to asset managers. If you handle European asset investments in Japan, for example, you have to go through one of the Japanese trust banks and they have focussed on the euro very late."
"A lot of organisations outside Europe have suddenly realised that they are holding potential euro products and that it is not just another currency. They have to re-price and re-value assets to handle the euro."
Complications also arise with the more esoteric financial instruments - currency futures and derivatives, for example. Here the conversion from national currencies to the euro presents difficult legal problems over contracts which will need sorting out.
IBM's Mr. Nacamuli notes, however, that the outlook is not all that gloomy. While the euro's introduction presents many challenges, it also offers plenty of opportunities for financial institutions to extend their market presence.
"You can see competition ramping up in the wholesale finance markets where some institutions are positioning themselves to offer clearing services. Others are exploiting niche markets - particularly those with strong regional roots."
(Financial Times, 5 November, 1998 - by Philip Manchester) |
