Exchanging European Equities

24 October 2000

On the Threshold of Revolution
Europe’s political leaders are pushing to get an early harvest of benefits for the citizen from EMU by pushing forward the creation of an effective single capital market. The Lisbon Summit in March set deadlines for 2005. The old model of a Stock Exchange club is rapidly disappearing as its regulatory functions go to the public sector and electronic trading platforms challenge the central functions. The pace of exchange consolidation is rapid: Euronext has announced its plans but the rival iX proposal from Frankfurt and London Exchanges has been thrown into turmoil by a bid for the London Stock Exchange from Sweden’s OM The clearing and settlement infrastructure is also undergoing its own revolution and central counter parties are emerging.

Summary**The structure of Europe’s equity markets is undergoing a revolution, and fast. Eventually, this will have profound consequences for all market participants: issuers, investors and the entire chain of financial intermediaries - from the collector of retail savings, to the Stock Exchanges and then right the way down the settlement chain to the ultimate security depositories and custodians.*** **EU political leaders see a genuinely single capital market as an early harvest*** of the benefits of EMU. So they are giving substantial political impetus to European Commission’s Financial Services Action Plan (FSAP) and agreed at the Lisbon Summit in March 2000 to have the key measures implemented by 2005. **Stock Exchanges are in the throes of the changeover from the old model*** of a club to the new model of a trading platform. In the old model, the club fulfilled several regulatory functions on behalf of the public as these happened to co-incide with the club members interests. But technology has suddenly made it possible to separate these ancillary functions and the public authorities have taken over many of them already. Thus the Stock Exchanges are left with nothing but the principal function: arranging a process for the orderly exchange of securities. In the modern world, this is little more than an electronic trading platform. **Structural reform is already proceeding at an astonishingly rapid rate.*** The Paris, Brussels and Amsterdam Exchanges have announced their plan to form Euronext. The London and Frankfurt Stock Exchanges announced a plan to form iX to compete but this was suspended after the Swedish OM announced a take-over bid for the London Stock Exchange. Other types of trading platform have also been announced and the settlement infrastructure is also undergoing a rapid revolution. **Horizontal or vertical integration?*** The thrust to rationalise downstream clearing and settlement operations is strong because it reduces costs directly. But the introduction of central counter parties can also free up capital held against settlement risk. The market can only develop in its chosen direction once the legislative/regulatory system is in place. **The structure of Europe’s equity markets is undergoing a revolution, and fast. Eventually, this will have profound consequences for all market participants: issuers, investors and the entire chain of financial intermediaries - from the collector of retail savings, to the Stock Exchanges and then right the way down the settlement chain to the ultimate security depositories and custodians.*** The magnitude of the gathering revolution is driven by the combination of technological advance and legislative intervention, coupled with unprecedented growth in equity trading volumes and increasing desire for globalisation. The intention is that equity markets can develop freely as users match the need for capital to raise the productivity of the economy with the rising tide of equity savings held by Europe’s greying population. All market participants throughout the chain of financial intermediaries are playing a role in facilitating this development, beginning with the politicians enabling the transformation to take place.

Contents
The Political Imperative The Lisbon Summit: Key Conclusions. European Stock Exchanges: The Old Model Exchanging Securities: The New Model Stock Exchanges: Timetable of Events so far The Transformation of the Equity Markets Participants The future - Horizontal or Vertical Integration ? How to Contact and Subscribe

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© Graham Bishop