Stripped OATs
Bond stripping separates coupon payments and bond principal redemption payments, thus creating the same number of zero-coupon bonds and a series of coupons. This technique makes it possible to trade the bond principal and interest payments separately.
France was the first European sovereign debt issuer to authorise bond stripping in 1991. It has since become the euro area benchmark for stripped bonds.
On 31 December 2017, outstanding fixed-rate OAT strips totalled €62.8 billion, equivalent to 4.62% of outstanding fixed-rate strippable bonds.
The market
The market for stripped OATs enjoys the same liquidity and security guarantees as the market for other Government securities. Stripping and unstripping are managed by an economic interest group comprising Euroclear France and primary dealers. This group establishes the rules for dealing in bonds of this kind. AFT acts in an advisory capacity.
Primary dealers act as market makers. OAT bonds are listed on the Euronext Paris exchange and traded on the basis of a discount rate expressed as an annual percentage calculated on the basis of 365 or 366 days (ACT/ACT). The price is rounded up to the fourth decimal place as a percentage of the par value.
The following formula is applied in order to calculate the price to be paid for a Strip:
n = number of full years 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 + 2 through Euroclear France, Clearstream International or Euroclear.
Fungibility rules
At the end of 2009, AFT introduced new rules for stripping and unstripping trades on fixed-rate OATs in response to market demand. The new rules introduced a new type of bond that makes no distinction between principal and interest: a “fungible zero-coupon bond”.
When stripped, OATs are now divided into a number of these bonds with the same par value (€0.01) but different maturities, modelled on cash flows attached to the original OAT. All same‑maturity bonds are fungible. They may also be unstripped to reconstitute the original bond or a synthetic bond composed of bonds from different OAT issues. Coupons from different OATs are mutually fungible if they have the same maturity.
Like all euro area bonds, the bonds issued after 1 January 2013 have collective action clauses (CACs), which means that they are not fungible with bonds issued prior to this date.