No one expects next year's changeover to the euro to be smooth. But for custodians and the investment community as a whole, the revolution could be particularly bloody unless organisations have a close look at the detailed changes that will have to be accommodated, warns Ian Dalton of Euroclear in Brussels.

Two of the biggest issues here are to do with redenominating and reconventioning debt," Dalton says. "We expect most sovereign debt of the 11 countries which are potentially going to form the currency bloc to be redenominated in the first weekend of 1999. That could be as many as 2,000 securities - it's a huge amount," he says.

Coping with different national decisions on the redenomination basis (minimum denomination or securities holding), the new minimum denomination (EUR 1 or EUR 0.01), or rounding will cause additional headaches.

Some countries will convert in a way which creates fractions of bond nominals, others prefer to deal with round numbers, and so will convert the fractional part to cash. "What do you do with a fraction of a bond?" Dalton asks.

Some managers of trusts believe they have a fiduciary duty to distribute these fractions. Other market players say an odd-lots market should be created to deal with the small amounts, though nobody seems eager to take on the role.

For countries which have decided to work in whole numbers of bonds, some intend to round down, and pay the fraction left over in cash, but the Netherlands has said it will round up - effectively creating securities. "If, as a trust manager you have to distribute that cash to all the beneficiaries of the trust, it will probably cost several times the value of each actual sum to complete the allocations," he says.

At the moment, accrued interest can be calculated in different ways, depending on who has issued the debt. It has been proposed that bonds sharing the same new currency, should also use the same conventions to calculate interest - making it easy to compare issues.

But countries may reconvene their existing debt at different times, Dalton says. Some countries will do this on the first coupon date after the launch of the euro, while Belgium has said it will do so over the first weekend of 1999, regardless of the coupon date. "The impact will be felt in both the back and in the front office."

Computer systems, already facing potential millennium bug upheaval a year later, may not be able to handle the changes convergence will bring. Firms should already know how they will handle fractions of bonds, cash compensation, rounding discrepancies and two accrual bases for the same coupon period, Dalton advises.

"The process has been made far more difficult by the absence of a central authority setting standards for all of this activity, but I think the time has gone for lobbying for central standards or cohesion in the process," he says. "Everyone has to establish what is going to happen to them, and what it is that they do not yet know about -and get clarification on that." Rachel Fixsen"

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