- A benchmark on the euro strips market 
- Technical information 
- Stripping activity 

- A benchmark on the euro strips market

The liquidity of French debt across the entire yield curve is strengthened by the existence of a very active strips market. In 1991, France became the first sovereign issuer to authorize the stripping of its securities and has since become the benchmark for this type of product in the euro area. Now a mature market, it attracts keen interest because of the introduction of the euro and the expected increase in long securities in view of growing retirement needs. On 1 January 2001 outstanding OAT strips came to about EUR 35 billion, corresponding to 11% of strippable securities outstanding. The French market remains by far the largest and most liquid strips market in the euro area. 

- Technical information

Introduced in June 1991, the French market in stripped OATs or Strips (Separate Trading of Registered Interest and Principal of Securities on OATs) is just as liquid and secure as the market in other Treasury securities (i.e. OATs, BTANs and BTFs). A group composed of Euroclear France and the SVTs manages and ensures the security of stripping and reconstituting operations. The French State is represented in this group as a censor.

1. Technical aspects 
End of  2009, responding to requests from primary dealers, Agence France Trésor has authorised new rules on stripping and reconstituting fixed-rate French Treasury bonds (OATs). The new procedure will introduce a "fungible zero-coupon certificate", a single certificate with no distinction between principal and interest. In future, when an OAT is stripped, it will be divided into a set of these new certificates, which have the same face value (€0.01) but different maturities calibrated on the cash flows from the original bond. All same-maturity certificates will be fungible with each other. They can also be put back together to reconstitute either the original OAT or a synthetic bond composed of certificates from different OAT issues.
The new stripping/reconstitution rules came into effect on 23 November 2009. Prior to this, an OAT was strippable into a principal only certificate (PO) representing the bond's principal repayment flow at maturity (with a €1 face value), and a set of interest only certificates (COs) representing accrued interest flows with due dates corresponding to the coupon payment dates of the original OAT (the face value of an CO was €0.25). 
The innovation is in line with efforts to modernise the strips segment, opened in 1991 on the OAT market. It will improve the liquidity of the French debt market. COs and POs still in circulation  may continue to exist  : certificate holders can choose either to keep them in the portfolio or to convert them (as from 23 November 2009 through Euroclear) into fungible zero-coupon certificates with the same maturity.

2. Previous aspects
The first transaction involving stripped OATs was announced on 23 May 1991 and took place on 12 June of that year, on the 8.5% 2019 OAT. SVTs holding a strippable OAT may present this security to Euroclear France and, in exchange for a bond, request separately tradable securities each representing an interest maturity, together with the capital maturity known as the principal. The face value of PO (principal only) Strips is EUR 1, and EUR 0.25 for IO (interest only) Strips.

From an accounting point of view, the SVT records a sale of a stripped OAT and the simultaneous purchase of a series of securities for identical amounts.

A Strip operation can be reversed at any time by assembling all of these distinct stripped securities. Interest certificates of a given maturity on OATs of different original terms are fungible.
Transactions
Participating SVTs undertake to make markets in Treasury Strips. Further, the OAT coupon certificates are listed and traded on the Paris stock market on a yield-to-maturity basis expressed as a percentage of a year of 365 or 366 days (ACT/ACT). The price is rounded off to four decimal places as a percentage of par value. The following formula is applied in order to calculate the price to be paid for a Strip:

where:
days = Actual/Actual
y = annual yield-to-maturity
n = number of years and days from value date to maturity
f = number of days between value date and the next 25 October (or April) divided by 365 or 366.
Strips are settled on D + 3 through Sicovam, Euroclear or Cedel.

3. Advantages
Stripped bonds allow, for example, final investors to improve the performance of their bond portfolio because of their greater sensitivity to interest rate movements. This offers them greater leverage than on a conventional OAT. Stripped securities also allow elimination of the interest rate risk linked to reinvestment of the coupons of a conventional security.

Moreover, the duration of OAT certificates is longer and these have a more sharply convex curve than on OATs of the same maturity.

- Stripping activity

Stripping activity