Stripped government securities

Market Organisation

The market for OAT strips enjoys the same liquidity and security as the market for other French Treasury securities. Stripping and unstripping are managed by an economic interest group comprising Euroclear France and primary dealers. This group lays down the rules for trading such bonds. AFT participates in the group in an advisory capacity.

The primary dealers that trade on this market act as market makers. OAT strips are listed on the Euronext Paris exchange. They are traded on the basis of a discount rate expressed as an annual percentage over 365 or 366 days (ACT/ACT). The price is rounded up to the fourth decimal place as a percentage of the par value.

Bond stripping separates interest payments from bond principal redemption payments, creating the same number of zero-coupon bonds. Using this technique, one can trade the bond principal and the related interest payments separately.
France was the first sovereign issuer in Europe to authorise stripping of its bonds in 1991 and has become a benchmark for this type of product in the euro area.

On 31 December 2022, outstanding fixed-rate OAT strips totalled approximately €55bn, equivalent to 2.6% of outstanding fixed-rate strippable bonds.

The following formula is applied in order to calculate the price to be paid for a Strip:

 Calcul FR.PNG
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 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”.

Stripped OATs are then 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 bonds with the same maturity are fungible. They may also be unstripped to reconstitute the original bond or a synthetic bond composed of bonds from different OAT issues. Interest certificates from different OATs are interchangeable (fungible) if they have the same maturity.

Like all euro area bonds, bonds issued after 1 January 2013 include collective action clauses (CACs), which means that they are not fungible with bonds issued prior to that date.