Wall Street Journal - 09/09/98
By NICHOLAS BRAY Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Thorkild Juncker has a simple recipe for a happy start to the coming New Year: Trade as little as possible in European currencies in the first few days of January, and make sure that whatever trading does occur is correctly filed and recorded.
The launch of the euro from the start of 1999 raises the specter of possible disruptions to the world's foreign-exchange markets, warns J.P. Morgan's London-based head of global foreign-exchange and
commodities trading. As a result, he adds, "being careful with settlements and back-office operations will be essential in the first three months of next year."
The reason? Nothing to do with major economic or political cataclysms, but simply the likelihood of a substantial increase in clerical errors relating to currency transactions, caused by a change in the way exchange rates are expressed, expected to accompany the launch of the euro on Jan. 1, 1999.
Precautionary Measures
As a precaution, J.P. Morgan is itself planning to reduce its trading in European currencies to a minimum on Jan. 4, the first business day of the New Year, and in the days immediately following, and it is advising clients to do the same.
"Events allowing," says Mr. Juncker, a 42-year-old Danish national, "the markets will probably be somewhat quieter than usual" in the first few trading days of next year.
"People will be trying to avoid very heavy dealing volumes on the first day of the year," the wiry former World Bank investment officer predicts. "They will avoid dealing forward to those specific first dates, and instead prefer to deal forward into February."
Such decisions are likely to be based purely on arithmetic, rather than on judgments of a strategic nature. At present, most European currencies, with the exception of sterling, are quoted in units per
dollar, rather than the other way round. When Europe's new currency is born, by contrast, it is widely expected to become the key numerator for trades between euros and other currencies.
That means that the euro/dollar exchange rate will be quoted as so many dollars per euro, rather than so many euros per dollar. The result will be a potential minefield for clients and traders, simply because it will take them time to get used to the new parameters.
New Conventions
"Today, you can say 'dollar/mark in 10' and everybody knows what that is: the price for that currency in 10 million dollars, quoted in marks per dollar," says Mr. Juncker. "Once the euro is introduced, however,
currency markets are likely to operate on the basis of price quotes in the euro against the dollar. This is such a big change for so many people, that the new conventions will take some time to fall into place."
That's not to say J.P. Morgan isn't ready for the switchover. On the contrary, like other big international banks, it has already implemented radical changes in its currency-trading operations ahead of the formal start of European economic and monetary union.
Since last May, when European-government leaders announced the bilateral exchange rates at which euro-participating currencies will be converted into euros, J.P. Morgan has seen transactions between
these currencies dwindle to a trickle. In parallel, it has witnessed increased interest in the currencies of emerging-market countries in Central and Eastern Europe and elsewhere.
In response, J.P. Morgan has cut the number of dealers trading in European currencies from 100 to 80, assigning as many as 20 to emerging-market European currencies, an area it scarcely covered five
years ago. It has set out to improve its trading systems, spending $110 million on EMU and Year 2000-related systems changes, out of a total technology spending budget of around $600 million. And it
has sharply increased its employment of outside consultants, as part of a strategy aimed at concentrating its own forces more on market expertise and drawing on external talent in technology matters.
Human Errors
None of that, however, is likely to eliminate what Mr. Juncker expects to be the biggest challenge facing currency markets in the early days of EMU: a likely increase in human errors.
Even under normal circumstances, he observes, out of around 7,000 currency trades a day at J.P. Morgan, some 100 are likely to require extra checking because a trader has forgotten to insert a date or
time or some other detail. Once the euro introduces a new element of potential confusion into the market, he says, that error rate may well increase, both at J.P. Morgan and at other banks.
"We all have to be very careful," he says. "If the errors start to pile up, back offices will start getting clogged up and then you start getting delays in the settlement system." If such delays begin to threaten the proper functioning of markets, he warns, they inevitably "will be of concern to the central banks in the system."
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