What’s next for Euronext?

Editor’s note: This article is one in a series of profiles of stock markets around the world. Please note that it presents Euronext’s perspective and omits other, possibly conflicting, points of view.

Europe’s stock exchanges are jostling for position. They might not have reached the point of consolidation fever, but the temperature is certainly rising. They all know that any big move by one of the larger exchanges could spark off a bidding frenzy.

Euronext is at the forefront of the consolidation process, its very existence being the result of the September 2000 merger of the Amsterdam, Brussels and Paris exchanges. The merger came at the time of the first major round of stock exchange consolidation in Europe with London and Frankfurt at an advanced stage of their discussions to create the unified iX exchange.

A couple of years down the line iX is dead – although the idea of an Anglo-German tie-up might not be fully buried – yet Euronext is very much alive and going strong. Towards the end of last year the pan-European exchange shocked many City traditionalists by acquiring the London International Financial Futures Exchange (Liffe). Its expansion continued apace in February after members of the Portuguese stock exchange unanimously accepted Euronext’s merger offer, allowing it to proudly claim that it operates exchanges in five markets.

Nor are Euronext’s sights set just on western Europe. February also saw the exchange sign a cross-membership and cross-access agreement with the Warsaw Stock Exchange. It might not be a merger as yet but many see it as evidence of intent for the future. Euronext also holds similar agreements with Luxembourg and Helsinki.

Of course, Euronext is quick to quash any suggestions as to where its next tie-up might lie. Milan? Madrid? London? Off the record, various Euronext sources have suggested that it would be ready to launch an offer for the London Stock Exchange should others step into the fray with a hostile bid. Not surprisingly, there is no such official confirmation of its bid strategy other than a desire to be right in the middle of the action. ‘We’re always talking to other exchanges,’ says George Möller, Euronext’s chief operating officer. ‘We have a very open line with other exchanges and would like to be at the core of European integration.’

Center stage

The truth is that, unless the Deutsche Börse-London Stock Exchange link-up reared its ugly head once more, it would be difficult to imagine Euronext not being at the core of European integration. It continues to bill itself as the first pan-European exchange – although Virt-X, the link-up between the Swiss exchange and Tradepoint, tends to disagree with that idea – and floated in July 2001 to help boost its finances. It is now in a relatively strong position should there be any further consolidation of the sector in the coming months. Möller also has a bird’s-eye view of any jostling in his position as president of the Federation of European Stock Exchanges, a job he took over from Euronext’s chief executive, Jean-Francois Theodore, last year.

It is all a far cry from just a few years ago when the idea that any continental European exchange might buy out London would have been laughed out of existence. Now, with the financial muscle and competitive nature of listed exchanges, the idea is anything but a joke. And Euronext is a key player in that equation.

Möller points out that the now defunct iX link-up between London and Frankfurt was one of the factors that originally kick-started the Euronext project. ‘There was a strong desire to come up with a solution for European equity trading,’ he says. But the original talks fell apart when the iX alliance was revealed, leaving Paris, Brussels and Amsterdam out in the cold. With the single European currency already up and running the demands for a more pan-European approach were becoming much louder. Institutions wanted to do basket transactions across borders and listed companies wanted the depth of a wider European market. ‘Ultimately we came to the conclusion that we would have to merge.’

We are as one

Möller says the original three cash markets now benefit from full integration, providing investors with easy access to a much wider international market regardless of which national gateway they choose to use as their entry point to the exchange. Harmonized trading rules, a single trading platform and single order book are all part of the package. Listed companies evidently benefit from such an approach, too, with the potential for greater liquidity and investor interest in their stocks.

Despite this cross-border approach, Euronext retains many nationally based elements in its markets. Part of this is due to cultural sensibilities; part of it due to regulation. ‘Markets still think very nationally,’ says Möller, pointing out that national indices such as the French Cac-40 are still among Euronext’s star products. The regulatory and legislative environment inevitably adds its own nationalistic edge too, with company law, securities commissions and the like all weighing in with their own view on the world and affecting the way in which listed companies from each Euronext market discloses information. ‘There are a lot of rules outside of our remit but there is a whole process going on in Brussels [at European Union level] to integrate that as well. They are working top down, we are doing it bottom up.’

Möller does not see any inherent danger from the European Union’s continuing legislative moves towards an integrated financial market. Indeed, he sees it as an opportunity. ‘It doesn’t scare us at all. We’re very well-positioned to take advantage if Europe really does become [integrated].’

Despite this pro-European stance, Euronext recently got into hot water with a number of securities industry associations for some of its proposals relating to changes to the EU’s investment services directive. Euronext was accused of trying to defend its position as a de facto monopoly by suggesting that all securities transactions be forced through stock exchanges. The proposal would have prevented a process known as ‘internalization’ in which brokers match customer orders across their own book.

But Möller says that Euronext’s position was misinterpreted and that it ‘was not an issue of trying to protect its so-called monopoly position’ at all. He adds, ‘Competition is the best way to build an effective European capital market – competition not only between regulated markets but also including electronic communication networks or alternative trading systems of any kind.’

More at stake

Of course, awareness that competition is likely to become even more acute in the future is one of the factors behind Euronext’s pan-European approach. Nor is it just up against European exchanges and trading networks in its fight for business. Nasdaq’s recent link-up with two smaller German stock exchanges has once again signaled the American exchange’s intent to expand across Europe. And as a listed company Euronext is all too aware of its newfound duty to shareholders to protect its market share and grow the business.

Euronext’s first results as a listed company this past March were not as promising as it had hoped. Trading volatility, bearish markets and the impact of September 11 all had their part to play in a 6 percent fall in cash trading, producing virtually flat 2001 net earnings. Euronext reported net profit of € 127.3 mn compared to € 127 mn the year before. Still, there were positive signs for the future. Derivatives trading volume was up by 22 percent, helped by uncertain market conditions, and the ongoing consolidation of Liffe into the group should help that trend in future years.

Revenues from clearing were also on the rise and Möller says that cross-border integration of the respective clearing and settlement operations is now high up on the strategic list. Euronext currently owns the Clearnet clearing house and has a small stake in the Euroclear settlement operation, having previously merged its settlement activities Negicef and CIK into the bigger operation. The eventual goal is one clearing system and one settlement system across all of the Euronext exchanges.

On the clearing side, Paris and Brussels are already using the same Clearing21 software system and Amsterdam is expected to join by the end of the year with the aim of creating a single, pan-European counterparty for all of Euronext.

Euroclear is automatically the preferred client for settlement. Möller describes the Euronext holding in the Euroclear operation only as ‘evidence of a strategic relationship’ and does not indicate any preference for increasing the exchange’s stake in Euroclear despite Deutsche Börse’s recent takeover of Clearstream.

‘It makes it cheaper for members if they can not only trade via one system but can also have one system for clearing and one for settlement,’ says a Euronext spokesman, referring to recent research showing Europe is seven to ten times more expensive than the US in these areas – mainly due to the cross-border trading costs. Euronext expects cost benefits from technical integration on trading, clearing and settlement to really begin to kick in this year.

What then is Euronext offering its listed companies by way of help in IR? Möller says the larger international companies on the exchange are not in that much need of help and that the priority lies in helping smaller and mid-cap companies get up to speed. He is encouraged by Europe-wide moves towards quarterly reporting and the introduction of international accounting standards and says that Euronext will help support companies through that process. ‘It’s a two-way street, though,’ adds Möller. ‘We cannot help companies if they do not want to be helped.’

Listed companies

Next steps
George Möller encourages companies to move to Euronext’s new market segments, NextEconomy and NextPrime, which have additional disclosure obligations such as quarterly reporting and IAS. NextEconomy is designed for companies whose core business lies in new technologies while NextPrime is made up of companies from more traditional sectors.

By the end of July, 114 companies were in the NextEconomy segment with 142 companies from traditional sectors listed on NextPrime. That represents almost one quarter of all domestic listed companies on Euronext’s Amsterdam, Paris and Brussels markets.

Euronext launched these new pan-European market segments in January 2002 in a bid to offer greater visibility to companies that choose to adhere to the stricter rules on financial transparency. ‘The rules in these segments require more openness,’ says Möller. ‘If companies take these steps then we can play a better role in helping them.’

One bit of extra help comes in the form of a NextEconomy and NextPrime investor conference in Paris, September 4-5, with several hundred European investors expected to attend.

Market capitalization (€ bns)