The euro changeover at the end of this month will enable investors to make big savings by pooling their cash in cross-border accounts. Rachel Fixsen looks at some of the new products on offer

It will certainly be a weekend to remember. The changeover weekend when the euro becomes the official currency of the 11 countries that have signed up for it begins on December 31 and ends on Monday, January 4, 1999.

The mere thought of it stirs feelings of dread and excitement for anyone involved in European investment. But when the dust begins to settle, comfort will be drawn from the potential savings to be made from having one currency to deal with rather than 11.

In cash management, most obviously the expensive complication of foreign exchange will be reduced and in many cases disappear altogether. Local currency units will still be used until the notes cease to be legal tender in more than three years' time, but the exchange rates to the euro are fixed irrevocably.

Besides foreign exchange costs falling away, there are also huge potential benefits for institutional investors in being able to pool funds in cash accounts across the euro zone to maximise returns. Custodians are already busy wheeling out new products to help clients take advantage of the cost reductions possible with a single European currency.

Pan-European, cross-border pooling solutions are high up on the list of new offerings from custodians. These in principle allow clients to earn collective interest on balances held in various independent EMU legacy currencies as they would on a single currency. The techniques are usually either zero-balancing, where funds physically move, or notional pooling, where they do not.

Bankers Trust has launched a product called Euro Global Treasury Management (EGTM). Without actually transferring funds, the EGTM product notionally pools balances of accounts held at Bankers Trust, whether they are denominated in euro or a legacy currency.

Deutsche Bank has developed a 'cash-pooling engine' that will provide the bank's customers with a number of options when considering the impact of the euro on optimisation of liquidity. The 'db-cash concentration' product will provide cross-border zero balancing or physical transfer of funds to a concentration euro account, while 'db-pooling' will provide interest optimisation or compensation without-cross border funds flow.

Futures and options trading has historically been undertaken locally across exchanges dominant in their local currency centre. Citibank says it has developed a single cash settlement account for customers looking to streamline their futures and options trading and settlement across euroland. This facilitates clearing across multiple exchanges, irrespective of market location.

Citibank also has a product that pools cross-border cash balances, called euro cross-border target balancing. At the last transaction of the day, Citibank automatically marks positions to zero and brings the offsetting position into a single account or location. Once positions have been centralised, Citibank can either consolidate them physically or notionally offset them, depending whether the investor or company has tax or legal issues with co-mingling funds.

Offsetting notionally, which allows you to get the benefit ... without actually physically moving the funds is sometimes preferred to target balancing due to reconcilement and accounting benefits," says Citibank's William Follini, director of European market management.

Apart from allowing clients to maximise bank interest on overall balances, there is a second benefit; this consolidation minimises balance sheet utilisation of a single entity by offsetting assets against liabilities. Paribas acknowledges that securities and cash within the euro zone still have to settle locally. So, says Jonathan Timpson, head of cash management sales in securities services at Paribas, a client has to have 11 security accounts and 11 cash accounts.

"We would like to get to the point where a client has 11 securities accounts but one cash account," he adds. The product which would do this is called Euro Global Account phase two. This will make reconciliation, liquidity and funding easier, says Timpson.

But from the first day of EMU, there will be two new products that will centralise funds. The first, Euro Global Position, aims to work out a client's net position, therefore reduce overdrafts and maximise credit gains. "With one currency, you can centralise more. If the client is going to be net short, then they can fund in the market, which will be cheaper," says Timpson.

One major change to the operation of European cash clearing systems with the advent of the single currency will be later cut-off times. At the moment various European markets have morning cut-off times, which give investors little chance to fund short positions in the market, often giving them no alternative but to carry an overdraft overnight. But from next year in the euro zone, the earliest cut-off times will be mid-afternoon, providing more of an opportunity to fund a short position.

The second new product from Paribas is notional pooling. The problem with physically moving funds, or sweeping, in order to create this benefit is the lack of fiscal harmony in the euro zone, Timpson says.

Bank of New York recommends its clients replace 12 different currency accounts with a single euro account. This surprisingly simple solution means there is no need for notional pooling or actual pooling of cash in different accounts to get the funding benefits. From that account, clients would be able to make not only euro payments but also payments in other euro-zone currencies. The client would have dual reporting on relevant transaction confirmations.

Bill Filonuk, Brussels-based product development manager for BoNY, says having one account means there is no need to worry about funding securities transactions in each of the euro zone countries until the end of the day. With one single account, trades made in a market with an early deadline would not have to be funded until the market with the latest deadline had closed. "That has always been a horrible nuisance, and this eliminates all of that," he says.

There is no need to have separate accounts for different legacy currencies, Filonuk says. He says he believes the reason the pooling question has come into discussion, is that some of BoNY's competitors require clients to have 12 accounts. But this gives rise to unnecessary transactions and ignores the nature of the new single currency. "It's really all euro, and local currency is just a denomination. It's the difference between 10 pence and two pence," he says.

However, where fund managers need to keep funds from different investors legally apart, they could have separate euro accounts, he says. BoNY is working with several fund managers to offer money market products in euro, Filonuk says. These provide one more tool besides commerical paper and bank deposits for investors to spread their counterparty risk on short-term cash investments, he says. The paper underlying the funds is all AAA-rated, he says.

Through BoNY's product Money Funds Direct, funds can be wired out of clients' cash accounts into these money market funds automatically when appropriate. All the client has to do is give one initial instruction.

Apart from spreading their exposure across a wider range of issuers, Money Funds Direct could enhance cash returns. But this depends how long the client could commit the money and assumes the yield curve is upwards sloping.

State Street, through its existing product Multicurrency Cash Administration, administers a client's cash according to an agreed mandate. Typically, pension funds that hold cash prior to distribution into investment portfolios can benefit. This cash can be invested in a range of investment products, which includes both US domestic and offshore money market funds, including funds denominated in euro.

Through Prime-Meridian, the State Street cash management platform, and Global Link, its treasury platform, clients and investment managers can automatically direct investments into a range of money market funds. With Multicurrency cash administration, the client outsources the responsiblity for initiating or directing cash investments to the custodian, State Street.

With the changes that will come about for clients when they have to deal with the single currency, electronic banking could become more attractive. Electronic banking products such as Deutsche Bank's 'db-direct' will offer customers real-time information and the ability to view account balances in both euro and legacy currencies.

Paribas' Timpson agrees that having electronic banking access to your account will be more important. "Reporting intraday has not been so much of a necessity with the cut-off in the morning," he says.

Having one currency rather than 11 should surely make intra-European cash management less costly by cutting the level of administration necessary for processing cash. And any technology which can smooth the process still further will help. State Street's product Quadrant automates the flow of information from investment manager to custodian and vice versa, using the SWIFT network. This includes the receipt of information from the custodian regarding asset holdings and cash positions.

"By automating and streamlining custodian information to the investment managers, in theory the managers should be in a better position to optimise the management of their cash," says Erika Arevuo, vice president at State Street Bank and Trust, responsible for multi-currency cash management in London.

Quadrant puts communications from the custodians to the managers in one format. So instead of having to deal with five, 10 or more different custodian formats, all the information is received into one application and one database, from which it can be manipulated or exported as required by the manager. Clients use Quadrant already and Arevuo says they are pleased that it links into their existing back office environment, rather than changing it.

New settlement systems are already in place for cross-border transactions within the euro zone. From January 4 next year, interbank payment systems will operate exclusively in euro. Payments can be routed through a national real time gross settlement (RTGS) system which links to Target, the pan-European interbank funds transfer system, and then on to the beneficiary's RTGS. National RTGSs include Chaps in the UK, Els in Germany and TBF in France. While Target is a gross settlement system, net settlement systems operate alongside it. They are usually cheaper but have some intraday risk. Most euro cross-border payments will be executed using the current system of correspondent banks or through EBA, which is a net settlement system, or through bilateral arrangements between banks.

Citibank's Follini says the key to the bank's euro strategy is its broad network of clearing in the euro zone. Because this network is so comprehensive, operating in all 11 Emu countries, the bank can clear payments without having to rely on Target. This insulates customers from the many different cash clearing systems that will continue to exist in the euro environment, Citibank says.

"We have an infrastructure that does what Target does, but more effectively," says Follini. "Citibank can route funds directly to the clearing system in which the beneficiary bank is a participant. This means there is just one touch-point into the clearing system. This is in contrast to routing via Target which would involve three touch-points in terms of two RTGS systems and its interlinking system," he says. This, Citibank says, enables it to retain far greater control in the settlement chain. With only one currency in the euro zone rather than 11, there are hopes that costs for custodians will fall, and that this will feed through into lower fees for clients.

"Any suggestion that costs of payments will fall at the outset of Emu have yet to be proven, in the short term costs are unlikely to be reduced," says Charles Rotheroe, global Emu co-ordinator at Deutsche Bank. "Many challenges associated with the euro still remain, the bank's customers and market practices will dictate the scale and speed at which the euro impacts on the financial markets," he says. "For this reason it will be vital for banks to ensure there is flexibility in their approach to euro liquidity, and in the bank's day-to-day market operations following the introduction of the euro."

However, Paribas' Timpson says the increased competition which a single currency will bring about should make banking fees cheaper. "Pricing will become more transparent. In every country, prices are different... in some countries there has been a cartel with the main local banks to keep prices high, and with the euro, that goes away," he says. Prices are being driven down, and cross-border fees disappear in many cases, he says.

The transition period between 1999 and 2000, is marked by the principle of 'no compulsion, no prohibition'. So given the freedom, how many institutional investors will change relevant accounts over to the euro that first weekend?

Although all custody activity will be converted 'big bang', since all trading activity will be denominated in euro, clients, for accounting purposes, will not go for a big bang conversion, says State Street's Arevuo. The conversion of accounting information into the euro is up to the client, and could happen any time during the conversion period, she says.

Pension fund liabilities are in legacy currency, and while these still exist for the next three years, the pension fund may prefer to see its assets in legacy currency as well.

To what extent investors in an 'out' country such as the UK will be able to take advantage of potentially increased efficiency in cash management depends on their strategy and sophistication, says Arevuo. But as the complications of foreign exchange fall away, managing cash should eventually become seen as just another investment, she says. "Generally it should be easier for clients to manage their cash. They are likely to be potentially more focussed on cash."

Whatever the eventual benefits of the euro may be, the logistics of the conversion itself are foremost in everyone's minds. Timpson says Paribas is ahead of the market in preparing for the introduction of the euro. In autumn 1997, it issued its comprehensive Euro Countdown handbook to clients, and released a second updated version in June this year. Paribas has also been through trial redenomination exercises with clients in order to prepare them for the big bang conversion coming up in a month. "In order for us to survive the conversion weekend, our clients have to survive it too," says Timpson.