Presentation by Hans Brouwer, Member of the Executive Board, Amsterdam Exchanges

I am delighted to be here today with such distinguished colleagues and to have the opportunity to participate in this timely seminar.

We are seeing that the European Exchanges are undergoing strategic changes in preparation for an integrated European Securities Market. My assigned presentation merging and consolidating is very wide-reaching, leaving room for extensive discussion in a number of areas well beyond my Amsterdam Exchanges brief.

Today I will limit my remarks to three main areas:

1) the structural changes in financial markets in both a European and Global context and as they pertain to the arrival of the Euro;

2) the reactions and responses of the Amsterdam Exchanges to the challenges inherent in this process; and

3) the forms of international cooperation developing between and among exchanges.

During this decade, we have experienced an extraordinary liberalization of capital flow within the European Union. In addition to a number of bank and insurance directives which have been drawn up, two European Union directives, particularly relevant to today's subject, were enacted. These of course were the Investment Services and the Capital Adequacy Directives of the mid-nineties. As a result, the European internal market has, to a considerable extent, already become a reality.

The Maastricht Treaty put this on a practical footing and, more importantly, provided concrete objectives for a European Monetary Union. This included the creation of a European Central Bank and the introduction of the Euro to replace national currencies.

Structural Changes

Before we look at the specific effects of the Euro on our markets, let's look for a moment at the position of the Euro in a global investment context - in terms of internationalization and other structural factors that affect our markets.

Investors worldwide are showing a steadily increasing interest in diversifying and internationalizing their portfolios. In response to this interest, companies are arranging multiple listings on European and American capital markets. Additionally, autonomous technological developments have contributed greatly to a further internationalization of the European securities industry.

For the European exchanges, the introduction of the Euro is just one more factor accelerating the development of internationalization, a development that has already been in progress for a considerable time.

Internationalization has, for years, been a recognized phenomenon at the Amsterdam Stock Exchange. Initially it appeared threatening, but in the end it has created significant opportunities for us.

For example, it can be said that remote membership, that is, the granting of access to the home market trading system to intermediaries based outside the home country, was invented in the Netherlands. It has been successfully applied in the Dutch market since mid-1993. Some 25 major investment houses are presently remote members in Amsterdam for the trading of Dutch government securities. Since the beginning of this year, the number of remote members in the share trading system increased. There are five members today and a large number of other firms have expressed interest. In this way, Amsterdam Exchanges is trying to give substance to its mission statement, to be and to remain the international market for Dutch securities.

In addition to the Euro, there are a number of other structural factors that are driving developments within the European Stock Exchanges. The globalization of the markets is unstoppable, The progress of technology, though costly, is most welcome. Institutionalization, which is already apparent in the UK and Dutch markets, will rapidly gain acceptance in the French, German and other markets.

Another important factor is the rapidly changing equity culture sweeping Continental Europe. We are seeing that more and more young adults look to the securities markets rather than any other available vehicle for investing their savings.

Likewise, owners and managers of smaller companies are finding that listing and trading their securities on stock exchanges both increases their visibility and deepens their investor base.

The final structural factor is the arrival of the Euro. Definitely, the Euro will have an immediate and very deep impact on the European interest rate markets. It is possible that there will only be one European Treasury Market and only one Interest Derivative Market. These may not necessarily exist in the same place or in the same jurisdiction.

However, as far as the equity cash markets and equity related derivative products are concerned, I foresee an acceleration of trends already mentioned but no clear or immediate departure from the pre-Euro environment.

The common currency will facilitate:

a)the creation of pan-European industries in both the commercial and financial sectors. This will lead to capital requirements on a European scale under very competitive conditions.

b)the further development of institutional investment and the propensity of institutions to diversify their portfolios into other than their home markets, and

c)the implementation of common regulatory and supervisory standards across Europe.

The Euro clearly presents us with opportunities.

AMSTERDAM EXCHANGES RESPONSE

My thesis is that you should not expect a decrease in the number of exchanges, but rather you should look for a rapid increase in the pace of reorganization and cooperation. Eventually, this will produce what investors and companies increasingly want - a virtually integrated European market.

When the new President Director of Amsterdam Exchanges, George Moller, gave his first interview to 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 its 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 already mentioned, I would like to expand a bit on Amsterdam Exchanges preparations for the Euro before I proceed to the subject of international cooperation.

In 1993, we set up an interdealer-broker as a member of the Exchange. This provided intermediary services for existing members, and now, as well, for remote members. This was years ahead of the ISD. Members could report their transactions via TRAX It should be noted that this was one of the first instances of cooperation between a Stock Exchange and the ISMA.

In 1994, we introduced Trading System Amsterdam (TSA), the fully electronic hybrid trading system. This system maintained the role of the Amsterdam jobbers, or hoekman.

Right now, we are presently evaluating this system. This month, our Share Trading Committee on this topic published their report.

This committee made up of market participants has concluded that the TSA was overall successful and meeting its demands. Most importantly, the Share Trading Committee advised the AEX management to concentrate as much liquidity as possible in the Central, order-driven, Market. This means that the AEX will focus trading in the Limit Order Book and - as we announced last week abolish AIDA and ASSET.

To provide pre-transparancy the AEX was advised to publish to all market participants the depth of the market in the Limit Order Book, as was the case with ASSET in the past.

Possible improvements can also be found in the functioning of the specialist. The Share Trading Committee concludes that the involvement of a human intermediary is an important asset of the Amsterdam market and wants this function continued. Many of the specialists so called privileges which were deemed unnecessary are to be abolished. The most dramatic finding of the committee is the possibility of having the specialist know the identity of the customer.

We also introduced complete compliance with the G-30 report relating to clearing and settlement, including T+3, and an automated lending and borrowing mechanism.

Last year, we amended that with a realtime, on-line trade-for-trade settlement system. The 1997 Review of Major Markets by GSCS praises the Amsterdam system. The report states that "Overall operational efficiency of the market remains very high, while risks are minimal."

We also introduced full remote membership for our equity market. Today we have more than 20 remote members in the government bond market and 5 in the equity market. Discussions are going ahead with a sizeable number of other firms.

At the beginning of 1997, Amsterdam Exchanges was formed. This was the result of a complete merger between the Amsterdam Stock Exchange, the world's oldest; the European Options Exchange, Europe's first derivative market; the two clearing organizations and the central security depository. This also includes AEX-data services and AEX-Information Technology.

We not only merged the organizations, we also demutualized them and sold 50 percent of the shares to non-members, that is institutional investors and listed companies. Incidentally, the main governing body in the organization is the Executive Committee. This is watched over by a Supervisory Board which is independent of shareholders. The former members, as users of the systems, form advisory committees. In this way, we remain close to the markets and maintain our members commitment to the organization.

The greater independence from members has produced more efficient and more productive, but still market-related, decisions. Ours is an integrated approach to offer competitive services for trading in primary and secondary markets, clearing and settlement, and information and networking - for domestic and foreign banks, brokers, investors and companies.

We are also in the process of shifting the approach of our organization from what you might call "regulation-led" to "marketing-oriented". Our record speed in setting up NMAX, the New Market for Amsterdam, as a part of Euro-NM, is an example of that.

An even clearer example is the new cooperation with FTSE in which we revamped our own Eurotop 100 into the first pan-European tradable FTSE Eurotop 100 product.

We recently redefined the guilder-dollar contract. It is one of the best Exchange-traded contracts. In a few years, this will disappear into the Eurodollar contract. It is presently called the DAX-option-contract and FDE futures contract. Both are running up to three years and are based on European style exercise and cash settlement.

Lastly, for the remainder of 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 will incorporate a margin system. This approach will enable us to merge both the cash market and derivative clearing systems into one clearing house. An important role is foreseen for the Dutch Central bank in the cash settlement side. Through this development, we expect to increase controls and decrease costs for ourselves as well as for our users.

The background music to the changes in Amsterdam was definitely pleasant to the ears and good for the Bourse. 1995 was a bull-year for all Amsterdam markets. In 1996, the cash market volume climbed by 60 percent and the options market by 70 percent. These figures obviously have something to do with internationalization, institutionalization and increased equity interest. In the first six months of 1997, the equity market in Amsterdam expanded its volume by more than 50 percent and out paced its sister bond market. The daily number of contracts in the options market shot up from 105,000 in 1996 to 180,000 in the first half of 1997.

The option on ABN Amro was Europe's most actively traded stock option contract, while worldwide only Intel and IBM traded more options during the first six months of this year.

The Amsterdam Exchanges options market is the largest equity and index options market in Europe and the second largest in the world. Our dependency on interest rate products is very low compared to Liffe, DTB and Matif. The Amsterdam market capitalization is the tenth largest in the world and fourth largest in Europe. Amsterdam p/e ratios are now fully in line with other mature markets.

INTERNATIONAL COOPERATION

As mentioned, I believe that instead of a decline in the number of exchanges, we will see an increase in cooperation between the exchanges. A number of European markets have already begun to work closely together:

  • The Amsterdam Exchanges is already in cooperation with TRAX to set up an
  • automated system which enables our members to report only once.
  • The three Benelux exchanges intend to set up a data feed, to arrange for facilitated cross exchange memberships and to set up common policies in the areas of remote membership, marketing and trading.
  • The Paris, Frankfurt and Swiss SWX exchanges cooperate in the area of
  • derivatives trading and clearing.
  • The AEX and the FTSE, itself half-owned by the London Stock Exchange, half by the Financial Times, created the AEX-FTSE-Eurotop 100 and 300, both of which will be traded in option form in Amsterdam. Futures trading may be done in various other markets on the basis of a license agreement.

    • A great deal wider is the cooperation between the so-called Euro NM markets Paris, Frankfurt, Brussels and Amsterdam. The intention is not only to set up a common data feed and cross membership for these growth markets, but also to set up a common marketing strategy. We expect to connect three of the four markets by the end of this year and the fourth one, F by the end of 1998. The cooperation between the Euro NM exchanges will enable intermediaries to trade in all four markets on screen simultaneously as well as provide exposure for high growth companies to a much wider investor base.

    As the European financial markets are in need of financial harmonization, the Euro NM is obviously open to any qualifying European growth market. When the Euro NM becomes a reality, it may well serve as the nucleus for the structure of the integrated European equity market - the definition of which would be home market liquidity assisted by remote foreign players.

    There is, however, life even beyond stock and derivative markets. There is Instinet, Tradepoint, Easdaq, the PTS, or PETS (Private Electronic Trading Systems) as it is called in Toronto.

    Then, of course, there is Internet, usable for everything with regard to the securities business. During the last months the problems with regard to safety and security have been solved and a lot of banks and brokerage firms are offering complete investment services to their customers via the net. Internet is no longer a matter of "as, if and when", but a reality; it is there. Last month the US electronic market Nasdaq made public that trade execution via online brokerages are at times responsible for already 12 percent of the Nasdaq volume!

    The website of Amsterdam Exchanges has more than 350,000 hits a day and presents price information, company news and portfolio management for securities, options and futures. Internet has closed the information gap between professional and private investors.

    Three Dutch banks make it already possible to execute trades via the net. If and when they will start their own exchange is in my opinion a matter of how exchanges react on this development: is it a thread or an opportunity.

    Judging by the figures produced by the International Federation of Stock Exchanges, the FIBV, most other European markets, - at least those consistently reforming - have shown major increases in turnover over the last few years. As I mentioned, however, all of them, both large and small, look to cooperate in varied forms. All these markets are concerned about demutualization, cost control, efficiency increases, remote membership, electronic order routing, electronization of limit order markets including blocktrade facilities, integration with derivative markets and further development of equity cultures.

    Based on our short nine month experience, we in Amsterdam have already seen the productive effects of the synergy we tried to create. Amsterdam Exchanges expects that its integrated approach to the delivery of services will produce important quality, as well as economies of scale, to its members. We are convinced of the fact that our one-stop-shopping offer to the market will create new and exciting opportunities. Therefore our mission statement has evaluated into: to be and to remain the international markets for Dutch securities, options and futures.

    THE EURO BANG

    In Europe, we, at exchanges, will be able to enjoy New Year's Eve and sleep late January 1st, 1999. While the weekend will be free, we will face the Euro-Big Bang on Monday, January 4th, the first day of trading in Euros.

    Amsterdam will be ready. There will be a complete switch to the Euro iii both the trading and clearing and settlement systems from the first day of trading. This means that trading screens, in both the cash and derivative markets, will no longer show amounts in guilders, once our systems are closed on December 30th, 1998.

    On a pan-European exchange basis, there are still a few points for consideration in connection with the Euro-Bang. These include harmonization of trading days and hours, interest calculations, coupon frequency, tick size and minimum lot.

    These immediate challenges naturally lead to longer term considerations. In 2005, where will we be? How far will we have progressed in cooperation or integration of European markets? Will we look back with success at this monumental venture? Will there still be exciting opportunities ahead of us?

    CLOSING REMARKS

    My synopsis indicated that I would talk about what happened in Amsterdam.