"A DUTCH VIEW OF THE CAPITAL MARKET IN BENELUX"
Given the favourable financial and economic climate of Benelux countries within the European Union and in anticipation of the arrival of the Euro, the focus today - and rightly so in my opinion - is on prospects for the capital markets in this region. In recent years, Dutch economic policy and the performance of the Amsterdam market have proved extremely positive. There is little doubt that the Netherlands will qualify for EMU - the same applies to our Benelux partners. Amsterdam is currently fifth in order of importance amongst the European stock exchanges and number ten in the world. We have managed to put ourselves in a strong position at the outset of a liberalised European capital market. However, we must not allow self-satisfaction to put us off our guard. On the contrary, we will need to stay alert if we are to expand on the position gained and consistently realign it.
Capital markets in Benelux are individually and jointly faced with an exciting challenge. The region's economic and financial potential is wide and promising. The introduction of the Euro will remove the currency risk and investors will be more inclined to make cross-border sector investments within the European Monetary Union. The larger European companies will also want to make use of more than one primary market to attract new capital. This all increases the need for efficient links between the existing financial markets in Europe.
Unfortunately, cooperation between the European stock exchanges is proceeding very slowly and there is still a risk of our missing the boat. The individual short term interests of the various European stock exchanges are still too frequently promoted; insufficient account is being taken of the European dimension. Cooperation at a regional level such as in Benelux now seems to offer more viable opportunities. I will return to this point towards the end of my address but let us first take a look at the European environment.
EXTERNAL DEVELOPMENTS
The environmental factors with which Amsterdam is concerned as a traditional, strongly internationally oriented financial centre, have altered at rapid pace in recent years. On all sides we see the liberalisation and deregulation of financial markets. More and more restrictions are being lifted and the introduction of a single European currency will be a radical further step on the road to the formation of a single European capital market without frontiers. It is still too early to say what structure this market will assume in due course. On the one hand, the introduction of the Euro may lead to trade being concentrated in certain European centres because of the disappearance of mutual exchange rate risks. This will surely be the case for fixed-interest securities, but it could also have a noticeable effect of the trading patterns of international stocks. On the other hand, increasing use of information technology would mean that stock exchanges will no longer operate in a closed geographic environment as in the past, but can make use oft networks which are potentially unlimited. The place where trading takes place is no longer bound to the location of the parties involved (buyers, sellers or brokers). As I see it, there will gradually develop a structure of partly competitive, partly complementary networks, not only amongst traditional exchanges but also with new, strongly commercially oriented trading and settlement systems.
Competition is further stimulated by the EU directives which have recently come into effect in the field of investment services (ISD) and capital adequacy (CAD). From 1 January 1996 these directives have facilitated the provision of cross-border services by brokers not established in the member state concerned and by the introduction of remote membership of stock exchanges outside the home market.
Thus the free circulation of capital is steadily being enhanced by the removal of traditional barriers and is moving in the direction of those markets or networks that offer their customers the best price-quality ratio. Under the influence of these developments, stock exchanges and off - the-floor facilities - especially those in the same time zone - will increasingly compete with one another in the struggle to win the favour of the supply and demand sides of capital and of brokers.
THE REACTION OF THE EUROPEAN STOCK EXCHANGES
Many European stock exchanges have undergone a dramatic modernisation process in recent years. They have strengthened their central role in trading domestic securities by creating the best trading systems of pricing and liquidity. The Amsterdam Exchanges NV has already been through a successful modernization process, creating a strong profile for itself as the international market for Dutch securities. The home markets have generally been successful in attracting volume. International professional investors are also currently showing a preference for transactions to be executed on the home market. For the time being this offers the advantage of more consistent liquidity and keener pricing, particularly as the majority of the shares of companies are actually held by their domestic and institutional investors. As liberalisation progresses, the international competition for investments, from international investors in particular, will increase. A healthy investment climate in the home country will become increasingly important as a competitive factor.
The "European passport" for brokers (ISD) strengthens each "home market" as international brokers can gain access to a large number of markets via remote membership. Naturally, in executing transactions, they too will always opt for the market that makes the best offer for each security concerned; and this will usally be the home market with its better liquidity and pricing provided that the service provided and the rates charged are competitive. Amsterdam attaches particular priority to attracting remote members.
Opportunities and threats
The ambitions of most European stock exchanges are at present limited almost entirely to maintaining their position in their own "home market". However, it is not unreasonable to assume that in the somewhat longer term the larger exchanges in particular will start to consider trading in stocks of other markets. This could apply to stocks whose ownership is internationally spread; as well as for those stocks where their domestic market systems are poor. The economies of scale of the larger markets thus represent a potential threat for the medium-sized and smaller markets in Europe. However, the latest technological developments enable efficient operating even on a smaller scale and such economies of scale should not be overestimated.
For medium-sized and small European stock exchanges, these threats also mean that these exchanges must (continue to) offer first-class trading and settlement facilities at competitive prices and they should aim for regional cooperation where this creates synergy. The introduction of the new cross-border technical facilities will allow smaller market operators to participate effectively in this new dimension and enable them to play a role that extends beyond their own home market. There are evident opportunities here in years to come.
A period of increasing market fragmentation will probably be followed by a period of consolidation. Whether such consolidation will then lead to a single joint structure which would be in the interests of the European market as a whole and offer the large and smaller exchanges a level playing field still remains to be seen. For the time being, therefore, a "survival of the fittest" climate must be anticipated, which will also offer good opportunities for the most efficient medium-sized markets.
MODERNIZATION OF THE AMSTERDAM STOCK EXCHANGE
The modernization of the Amsterdam Exchanges NV in recent years means that the exchange already meets the international requirements as far as the important aspects are concerned. Trading systems have been radically revised in the past few years. The introduction of the wholesale/retail threshold makes, for the first time, a formal differentiation between the trading opportunities for private and professional investors. The result is that both parties are served to best effect while market fragmentation is avoided and trading costs have been substantially reduced. This approach has already strengthened the position of the Amsterdam Exchanges NV. Spreads are predominantly better than under competitive foreign trading systems which has led to the return of some of the professional trading in bonds and shares which in previous years had migrated to London. The continuous nature of liquidity and pricing is also attracting new volume, so that the market is also showing strong growth internationally.
In addition to a good trading system, international securities trading also requires an effective settlements system. In this respect, the Amsterdam Exchanges NV has an excellent reputation. It has played a pioneering role in this since the introduction of Securities Clearing in 1963. In order to meet the requirements of the international professional trade, the Securities Clearing netting system has since been supplemented with transaction-based settlement ("trade-for-trade") which, with regard to charges and quality, is more favourable to the user than the alternatives available abroad. This is a full delivery versus payment procedure with cash settlements through the Netherlands Bank, an ideal arrangement also from the risk aspect. In the year ahead, under the new exchange structure, Securities Clearing and Necigef will be combined into one new settlements and depositary institution (Amsterdam Securities Depository, ASD).
NEW ORGANISATIONAL STRUCTURE
Thanks to the new trading systems, the advanced processing facilities and the balanced supervisory structure, the Amsterdam Exchanges NV is excellently placed for the international competitive struggle. However, as already mentioned, this is not enough to guarantee continuity in the long term. The organisational structure must also be tailored to the developments being manifested ever more rapidly within the force field of international competition. The new structure of the Amsterdam Exchange, to which the finishing touches are now being put, must be able to stand its ground with other on-floor and off-the-floor competitors in terms of cost and capital structure while maintaining it's characteristic quality. Under the new structure now being discussed in Amsterdam, the Stock Exchange, the EOE Options Exchange and the settlements body will be incorporated within a single holding company whose shares will be held by the intermediaries (50%), listed companies (25%) and institutional investors (25%). All market operators will therefore be involved as stakeholders in this joint operating arrangement.
COMPETITION OR COOPERATION FOR BENELUX EXCHANGES?
Although all three Benelux exchanges have shown sound development, the advantages of cooperation must be taken seriously in the light of the European competition. There are five separate activities in a stock exchange which together make up the basic securities transaction product: quotation; dealing; processing (clearing and settlement); networking (having a more or less linked-up network with brokers); and information management. Analysis shows that the Benelux exchanges are very similar to each other in these core activities.
There is virtually no overlap between shares quoted in Amsterdam and Brussels. Luxembourg has an outstanding position where obtaining European quotation of bonds/Euro loans from investment funds is concerned and has created a valuable "niche" for itself in this field.
The three exchanges are not really competing with each other at trading level. The volume of trade derived from each other's markets is limited. Interest in each other's stocks may be expected to increase following the introduction of the Euro. Both Luxembourg and Brussels possess a "state of the art" electronic trading system. Of the three Amsterdam is the most international exchange, with the largest trading volume and a large number of shares of high international repute, some of which are also listed in the American time zone. At settlements level, the exchanges do not compete with each other. The processing systems and organisations are nationally organised but are still at different stages of development.
Amsterdam has brought the exploitation of information under its subsidiary Beursdata. The most important product is the electronic datafeed Artemis which can be seen worldwide on many terminals. This worldwide penetration may be attractive to Brussels and Luxembourg. Cooperation on this point may also offer efficiency advantages in view of the increased scale: substantial additional turnover can be realized for a relatively small increase in costs.
The exchanges at Brussels and Luxembourg possess excellent national networks as a result of their recently implemented electronic trading systems. Amsterdam has since signed up around 25 foreign members.
BETTER MUTUAL ACCESS
Since, as we have confirmed, there is at present little duplication between the three Benelux exchanges our customers will increasingly wish to make use of the reciprocal markets. The need to cooperate is obvious, initially to improve mutual access to our markets. In doing so, we must not limit ourselves to information but we should also consider how the members of the Benelux exchanges can obtain access as efficiently as possible to the reciprocal trading systems. Preference is given to a scheme under which the Benelux exchanges would be "remote members" of each of the other markets with one point of contact, namely their own home market, instead of three. It would have to be possible technically to opt for linkage to the trading system of another exchange through one's own exchange. A single connection would then also suffice for remote members.
It is most encouraging that there is an active interest in investigating cooperation on these matters. After all, the better the service we can offer our clients, the stronger our markets will be able to perform in Europe.
PROSPECTS
I conclude by saying that the modernization policy at Amsterdam has created the conditions for the exchange to maintain its position as an international financial market, principally and initially for trading in Dutch securities. The new stock exchange structure will be able to implement an effective, integrated policy based on the desires of all users. Furthermore, a broad range of services is offered, specifically geared to trading in Dutch securities and the products derived therefrom and the efficient processing of such transactions. The most important advantage is that all services will in fact be available across one counter. I anticipate that the three Benelux exchanges will be willing and able to cooperate with a view to strengthening the capital market in our European region. In particular, this means promoting rapid and efficient mutual access to each other's markets. This strategy will prove profitable to all three exchanges.
For more information please contact:
Thom Hoedemakers Paddy Manning
Amsterdam Exchanges NV St James Corporate Communications
Tel: +31 20 523 4014 Tel: 0171 436 4101