Speech Paul Arlman,
Director International Affairs
Amsterdam Exchanges
Enquiries:
Amsterdam - Paul Arlman: + 31 20 523 4004
London - Paddy Manning: + 171 43 6 41 01
What future for the European Stock Exchanges?
1. Mr Chairman.
Immediately following the Amsterdam Summit I feel the trepidation of the battlefield messenger. Straight from lunch to the graveyard slot do they still, as in ancient times, slaughter the messengers.
2. Ladies and gentlemen.
When you look at the title that the conference organisers suggested for my speech today, it must seem that I speak with authority on behalf of all European Stock Exchanges, including London. That of course is not the case; my colleagues are quite capable of speaking for themselves. I will therefore only argue on behalf of Amsterdam Exchanges, but I will liberally be using published material from my various colleagues and competitors.
3. When discussing the future for the European Stock Exchanges one should include not only as suggested, the smaller organisations but definitely also the, three largest financial centers. All Stock Exchanges and many related organisations are in a process of cooperation and competition at the same time.
My answer to the basic question 'what impact of the euro to the future for the European Stock Exchanges' is not to repeat Dr. Breuer of Deutsche Borse and Deutsche Bank 'there are too many stock exchanges', but to say: 'you will see more intensive competition and cooperation in many areas and many fields and in increasingly varied form'. All such cooperation however, will be aimed at decreasing costs and at increasing the quality and the variety of services offered to the participants in the markets.
4. A number of structural factors drive the developments of and within the European Stock Exchanges even more than the advent of the euro as such. The globalisation (see endnote 1) of the markets is unstoppable (see endnote 2), the progress of technology costly but welcome and the institutionalization already obvious in the UK and Dutch markets, will rapidly gain pace in French, German and other markets (see endnote 3) The Annual Reports over 1996 that various large pension funds have brought out in the last few weeks, show a consistent increase in their international equity holdings (see endnote 4) US financial institutions also decrease their US-bias in investment. As important as the institutionalization is the rapidly changing equity culture in continental Europe where more and more (younger) savers look to the securities markets more than to any other channel available to them.
Owners and management of smaller companies increasingly find that listing and trading at Stock Exchanges broaden their scope and deepen their investor base. Companies more and more recognize the force of the financial markets and the need to provide for appropriate corporate governance structures. Like the Cadbury and Greenbury Committees in England and the Vienot Committee in France, the Netherlands will soon have it's final report on Corporate Governance, drafted by the Peter's Committee of which I am proud to be a member.
As was noted by ABN AMRO's CEO, Mr. J. Kalff (see endnote 5), many financial markets are rapidly opening up. I'd hope they'll become as open and international as Amsterdam has traditionally been.
On purpose the last structural factor I mention to you, is the arrival of the euro. Definitely, the euro will have an immediate and very deep impact on the European interest rate markets, where possibly only one European Treasury Market will remain and one Interest Derivative Market as well, although not necessarily at the same place or in the same jurisdiction.
However, for the equity cash markets and equity related derivative products, I foresee an acceleration of trends already mentioned but no clear and immediate rupture with the pre-euro past. The common currency will facilitate (a) the creation of European level industries, commercial and financial (groups of) companies, leading to requirements for capital on a European scale under competitive conditions (b) the further development of institutional investment and the propensity of institutions to spread their portfolios into other markets and (c) the implementation of common regulatory and supervisory conditions in Europe.
The euro clearly presents us with opportunities.
In the area of equity listing and trading there is still what Le Monde the other day phrased, when discussing the Union of the 15 and the shock between cultures, a 'mosaique de cultures nationales'. Legal systems, taxation, language, history and customs are very different and can only be brought together in a market led harmonisation. As Dr. Duisenberg noted: ' a profusion of rules and regulations can be the very source of instability' (see endnote 6).
Therefore my thesis is that it is not so much a decrease in the number of Exchanges that you should expect but instead look for a rapidly increasing pace of reorganisation and cooperation. Eventually this will deliver what investors and companies increasingly want: a virtually integrated European market.
6. When the new Chief Executive of Amsterdam Exchanges. George Moller, gave his first interview in the Dutch press, he underlined that'-Amsterdam Exchanges has a good starting position, but one should not overestimate one's European ambitions. Amsterdam Exchanges is open to non-Dutch companies' listing, in view of it's own good quality record in that area, and boasts of a number of European products and of a loyal private investor following'.
From that perspective and in the context of the structural factors mentioned, allow me to expand a bit on Amsterdam Exchanges and our preparations for the Euro future before returning to the subject of international cooperation.
7. In 1990 we established a cost control system, abolished the fixed commission structure, and the Government conveniently abolished the Stock Exchange turnover tax.
In 1993 we set up an interdealer-broker as a member of the Exchange providing intermediary services for existing members and years before the ISD, as well for remote members that could report their transactions via TRAX, one of the early occasions of cooperation of a Stock Exchange with ISMA.
In 1994 we introduced Trading System Amsterdam (TSA) the first fully electronic hybrid trading system in Europe while maintaining the role of the Amsterdam jobbers (the hoekman). We are still today grateful for the assistance of the New York Stock Exchange, the London Stock Exchange, the Paris Bourse and the Deutsche Borse to allow us to steal liberally the best elements of their various approaches. We are grateful to SEAQ International which provided the competition in the late eighties and some of the impetus that Amsterdam needed to modernize in the nineties. TSA clearly delivered, among others major volume increases, sharper spreads and greater transparency.
We also introduced complete compliance ,with the G-30 report relating to clearing & settlement, including T+3 in business day and an automated lending and borrowing mechanism.
In 1996 we added to that a trade-for-trade settlement system. Praise comes from the 1997 Review of Major Markets by GSCS which said: '0verall operational efficiency of the market remains very high, while risks are minimal'.
We also introduced full remote membership for our main equity markets. As of today we have 21 remote members in the government bond markets and 5 in the main equity markets. Discussions are going on with a good number of others.
At the beginning of 1997 Amsterdam Exchanges was formed as a result of a complete merger between the Amsterdam Stock Exchange. the world's eldest. The European Options Exchanges, Europe's first derivative market. the two clearing organisations and the central security depository. This also includes AEX-data services and AEX-Technology.
We not only merged the organisations. we also demutualized them and sold 50% of the shares to non-members, i.e. institutional investors and listed companies. Incidentally the main powers in the organisation are with the Executive Committee, supervised by a Supervisory Board which is independent of shareholders. The former members, as users of the systems, form advisory committees, to remain close to the markets and to maintain members' commitments.
Based on the short six-month experience we already now see productive effects of the synergy we tried to create.
The greater independence from members produced more efficient and more appropriate but market related decisions. Ours is an integrated approach to offer in competitive conditions services in trading in primary and secondary markets. clearing and settlement, information and networking. for domestic and foreign banks, brokers, investors and companies. We are also in the process of shifting the approach of our organisation from what you could call regulation-led to marketing-oriented. Our record speed of setting up NMAX, the Nouveau Marche for Amsterdam. is an example of that but even more clearly it is the brandnew cooperation with FTSE. in revamping our own Eurotop 100 into the first pan-European tradable FTSE-Eurotop 100 product. The other day we redefined the guilder-dollar contract. It is one of the best Exchange traded contracts that will disappear into the euro-dollar contract in a few years time, and is now called the DAX-option-contract and FDE futures contract, both running up to three years and based on European style exercise and cash settlement.
These major changes were accompanied by the transfer of some powers to the Securities Board of the Netherlands. However Amsterdam Exchanges remain a self-regulatory organisation relating a.o. to trading and business conduct rules.
Lastly, for 1997 and 1998 we plan a restructuring of our existing clearing for the cash market. This will involve the introduction of banks as clearing members and a margin clearing system. This approach will enable us to merge both clearing systems into one clearing house. An important role is forseen for the Dutch Central Bank in the cash settlement side. Thereby we expect to increase total control and decrease costs for ourselves as well as for our users.
8. The background music to the transitional processes in Amsterdam was definitely pleasant to the ears and good for the Bourse. Where 1995 was a bull-year for all Amsterdam markets, the cash market volume jumped up by 60% in 1996 and the options market even by 70%. These figures obviously have something to do with the internationalisation, with the institutionalisation and with increased equity interest. But there is more, because in the first six months of 1997 the equity market in Amsterdam grew to be larger than the bond market and jumped in volume by more than 50%. The daily number of contracts in the Options market shot up from a 105.000 in 1996 to around a 180,000. Last Friday an absolute record of 275,000 contracts was reached. This incidentally makes Amsterdam Exchanges' Options Market the largest equity options and index options market in Europe and the second largest in the world. Our dependency on interest rate products is very low, certainly when compared to Liffe, DTB and Matis. The Amsterdam market capitalisation stands at number 10 on a world - and at number 5 on an European basis. Amsterdam p/e ratio's are now fully in line with other mature markets.
9. Judging the figures produced by the International Federation of Stock Exchanges (FIBV) most other European markets, at least those consistently reforming, have shown major increases in turnover over the last few years. As I said however, all of them look to cooperate in varied forms and that is not limited to the small ones. Common to them all are discussions about demutualization (see here in London the proposals by the all party Treasury Committee just before the elections) cost control and increase in efficiency, remote membership, electronic order routing, electronlzation of limit order markets including block-trade facilities, discussions about integration with derivative markets and further development of equity culture.
10. As a way of illustrating that you will not see a rapid decrease in the number of Exchanges, but should expect increasing cooperation in varied form, let me mention a few, which incidentally are not only in Europe but also with outsiders. Similar developments are visible in other markets far away from the euro.
11. However. there is life beyond stock and derivative markets. There is Instinet, there is Tradepoint, Easdaq. and there are the P T S or as they call them in Toronto: Pets, private electronic trading systems. So far, Instinet has shown itself a loyal member in a number of European Exchanges, acting as a dealer-broker. Most institutional traders in Europe seem not to be too much attracted to seek other forms of trading, certainly not when many, stock Exchanges provide for separate forms of institutional trading, allowing for specific requirements of institutional traders to be met. Tradepoint's system will meet it's true test and marketability when the London Stock Exchange introduces it's own electronic limit order book.
- Already mentioned is the cooperation that Amsterdam Exchanges has with TRAX to enable our users to only once and via an automated system that they are already connected to. Similar arrangements are visible e.g. Easdaq with Intersettle and Trax and Societe des Bourses Francaises with Euroclear.
- Of a different character is the recently concluded memorandum of cooperation between the three Benelux Exchanges. They, or we, intend to set up a common data feed, to arrange for facilitated cross Exchange membership and to set up common policies in the areas of remote membership, marketing and trading.
- A great deal wider is the cooperation between the so-called Euro NM markets (Pans, Frankfurt, Brussels and Amsterdam). The intention is not only to set up a common data feed and cross exchange membership for these growth markets; we are already advanced in a common marketing strategy. Also and most importantly, we expect to connect 3 of the 4 markets by the end of this year and the fourth one (Frankfurt) in the course of 1998. This would enable intermediaries to trade in all four markets on screen at the same time and will provide exposure for high growth companies to a far wider investor base. Obviously our project as European financial markets in general, is in need of harmonisation of rules and technologies. However, this will be market driven and not committee inspired. Euro NM obviously is open for accession for qualifying other European growth markets.
- Paris of course, is in a advanced stage of cooperation with the Brussels Exchange relating to trading technology. Moreover, they will also set up a joint venture in the area of technology development which is open to other markets. The Paris bourse has just concluded an agreement with CME to exchange the new Paris trading system and the new American clearing 21 approach.
- The Swedish privately owned OM Market is apparently not going to merge with the Stockholm Stock Exchange of which it owns 21%. This would be vertical integration. However,OM has a close cooperation with Oslo in the equity derivatives area. Stockholm in its turn will share with the Copenhagen Exchange it's trading technology, in effect creating one market. This is horizontal integration.
- The cooperation between Frankfurt and Swiss SWX exchange in the example where cooperation is not limited to the so-called smaller markets. They set up Eurex, which will participate in SWX cooperation with Chicago's CBOE and OCC.
- I already referred with pride to the cooperation between Amsterdam Exchanges and FTSE itself half-owned by the London Stock Exchange, half by the Financial Times. Our FTSE-Eurotop 100 will be traded in option form in Amsterdam and futures trading may be done in various other markets on the bases of a license agreement.
- That is not the only form of new index related products. You will have seen that Dow Jones is now allowing others to make its indices tradable, in cooperation with CBOT in futures and futures options, with the CBOE in options and with AMEX in unit trusts.
- Sparked by the EMI, some European CSD's have set up a common organisation, furthering linkages across Europe.
- My last example is the merger at the end of this year of the Antwerp Stock Exchange with it's Brussels colleague. Some claim that Antwerp is the oldest Exchange in the world, we in any case claim to be the oldest stock Exchange and that claim will therefore definitely be indisputable on January 1, 1998.
There's of course Internet, usable for data dissemination and order-routing in the short run. For Internet's usage in the longer run, I do not dare to make a prediction. Safety and security are key words for further employment in the securities business.
Easdaq represents the supra-national approach in cooperation or competition with existing nationally organised Exchanges. The right question however is whether a pan-european Exchange 'de novo' organised, will be able to attract the liquidity, the quality and efficiency that both private and institutional investors need. So far, Easdaq's performance in the real world (like number of listed companies. volume or price developments) is extremely limited, certainly when compared to the combined performances of the four Euro NM markets.
12. A final word on the introduction of the euro:
The Federation of European Exchanges has drafted a paper published at the end of May this year, relating to the introduction of the euro in European securities trading. The document recommends its member Exchanges a Euro-big-bang as of January 4, 1999. It also recommends to adjust a number of market- and trading-practises, but makes clear these should be market- and not committee-driven.
Ladies and gentlemen, I thank you for your kind attention.
ENDNOTES
For further information contact Thom Hoedemakers, Amsterdam Exchanges AEX Amsterdam: + 31 20 550 4540 or Paddy Manning St James Corporate Communications London: + 44 171 436 4101
- 1)See on globalisation now and in the early 1900s Dr. S. van Wijnbergen in 'The convergence of the three economic world powers and it's effects on the financial markets'. (ABN AMRO 1997)
- 2)See for instance the May '97 IMF World Economic Outlook.
- 3)See Dr. O. Macdonald's study for APAX 'The future of Continental European Private Pension Funds and their inpact on the Equity Markets'.
- 4)Unilever's Progress Fund, ABP, Philips Pension Fund.
- 5)At ABN AMRO's Globalisation and Convergence Conference, June 1997.
- 6) Dr. W. Duisenbeg, President Dutch Central Bank at ABN AMRO's Conference
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.