証券取引所Annual Report 2001.pdf

W O R L D F E D E R AT I O N O F E X C H A N G E S

A N N U A L R E P O R T

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WORLD FEDERATION OF EXCHANGES

P r e s e n t i n g t h e F e d e r a t i o n

I n t r o d u c t i o n

Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11The Working Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12The Member Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Market Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Internal Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

E v e n t s

2001 General Assembly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312001 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Derivatives Workshop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Data Management & Vending Workshop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Applied Technology for Exchanges Workshop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

R e p o r t s

Cost and Revenue Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Current Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

E x t e r n a l R e l a t i o n s

Affiliates & Correspondents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Eaosef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Feas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Fese . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Fiabv . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Ioma/Ioca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69International Financial Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Sta t i s t i c s

2001 Market Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77The Equity Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85The Debt market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Stock Market and Macro-Economic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131The Parallel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Other Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151Selected Statistics on Derivatives Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Annex / Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

T A B L E O F C O N T E N T S

Letter from the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Significance of the Exchange Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Letter from the Secretary General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

F i n a n c i a l A c c o u n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

World Federation of Exchanges - Telephone: 33 (0)1.58.62.54.00 - Fax: 33 (0)1.58.62.50.48Home Page: http://www.world-exchanges.org E-mail: [email protected]

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L E T T E R F R O M T H E P R E S I D E N T

2 001 was a year of resiliency andrecovery for markets and their

operators. At a time of unprecedentedstrain, exchanges stood the test.

The issues before the exchange indus-try were of the greatest importance.First, a bit of perspective : with regardsto share performance in the equity cyclethat began some twenty years ago,March 2000 was the historic high pointin the Federation member exchanges’total market capitalization. The full year2000 had the highest level of fresh cap-ital raised in the history of this indus-try, as well as the highest equity trad-ing volumes ever recorded. This cyclehas completed the transformation ofexchanges into key macroeconomicactors.

2001 proved more difficult. The mar-ket capitalization and volume figuresfor equities still trended down, as didraising fresh money on exchanges. Theturnover velocity figures remained high,however. This demonstrated not onlyactive market interest, albeit at lowerprices, but probably that much of thebusiness related to equities was beingconducted back and forth between cashand the ever more active derivativesmarkets. Even in this tougher invest-ment environment, the central role ofexchanges remains unchallenged. Thecomplete sets of figures are to be foundin the statistical section of this report.

For the member exchanges of the Federation, the year 2001 also saw thecontinuation of the broad trend thatbegan in the last half of the 1990s to switch from a business structurebased on broker cooperatives withinside ownership to for-profit limitedcompanies with outside owners. Formost of the Federation’s members, busi-ness objectives changed with this new

governance form. The heightened com-mercial feel of this industry alsoaffected those exchanges maintainingtheir mutual legal form, and they haveproven themselves to be successfulcompetitors. The dynamism of thesebusinesses is one reason for the qual-itative difference in the role ofexchanges in the 2000s : the marketscould not have grown on that scalethroughout that long cycle if their oper-ations were not of good quality – andseen to be of good quality.

Exchanges are identified with the highlycommercial spirit of the times.Exchanges symbolize capitalism, andare at the heart of the system. The levelof their activities gives an instant short-hand summary of entire nations’ socioe-conomic health.

Exchanges’ centrality to social wealthcreation has been established. Corpo-rate treasurers need to factor in theirability to tap this source of cash byissuing securities, just as finance

ministers try to find fresh resources fornational budgets with their privatiza-tions of state-owned businesses, whileat the same time introducing new pos-sibilities for savings and encouraginga more dynamic private sector. Publicawareness of the need to invest hasprompted great individual interest inequities and related exchange-tradedproducts, too. A further benefit hasbeen the broadening of share-owner-ship, and with it the loosening of mar-ket forces for better corporate gover-nance practices.

Exchange managers now need to par-ticipate more fully in public policydebates when their business is dis-cussed; in money markets the agendais disproportionately concerned withissues of banking and insurance. Giventhe complexity of operating a regulatedsecurities exchange, their successfulevolution going forward cannot betaken for granted, and the experienceof bourse managers must be put to useas a key tool in devising proper

Antonio Zoido, President of the World Federation of Exchanges and the Madrid Stock Exchange

WORLD FEDERAT ION OF EXCHANGES

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L E T T E R F R O M T H E P R E S I D E N T (CONTINUED)

policies. This was yet another reasonwhy the financial and economic envi-ronment in 2001 was so challenging.

Exchanges need independence andfreedom to operate within the rulesof the regulatory environment. Thesethemes and others were raised at theAnnual Meeting held at the Bolsa deMadrid last October. One clear signthat business in exchanges is notbeing conducted as before is thatmembers gave up the longstandingname FIBV, indeed the name underwhich this organization was founded41 years ago. The new name "WorldFederation of Exchanges" is thoughtto be simpler. It is also meant to sig-nal the welcome into this exchangeindustry association the derivativesmarkets which are so intimately asso-ciated in the work of members andthe pre-and post-trade lines of busi-ness which are vital fields of businessdevelopment. It also should under-score the more clearly competitiveenvironment in which members operate.

More information on the viewsexchanges managers have about theirindustry is included in the next chapter of this Annual Report enti-tled "The Significance of the ExchangeIndustry."

In a very different spirit, I wish toexpress the full solidarity of Federa-tion member exchanges for their col-leagues in New York who suffered thehorror of the terrorist attacks on Sep-tember 11. As this letter highlights,exchange operators are keenly awareof the social and economic functionthey play in national wealth creationthroughout the world. Individuallyand as a group, we will continue todo out utmost to carry out ourresponsibilities in creating and devel-oping one of the keystones of theinternational economy. We also saluteour colleagues for their heroic effortsin getting the markets up and run-ning very rapidly in terrible circum-stances.

My letter concludes with the expres-sion of my warm appreciation to the

Board of Directors for its activeinvolvement in the affairs of the Federation, member exchanges fortheir participation in the life of thisassociation, and the Secretariat forcarrying out its good work.

Antonio J. ZoidoPresident of the World

Federation of ExchangesMarch 2002

THE SIGNIFICANCE OF THE EXCHANGE INDUSTRY

March 2002

WORLD FEDERAT ION OF EXCHANGES 5

At the Heart of the World Economy

Over the past decade, regulated securities exchanges havecome to play a major new role in the international financialsystem. That role is qualitatively different from anything seensince World War II. Quantitatively, the markets operated byregulated exchanges have grown to a scale unimagined before,giving them an active role and responsibility at the heart ofthe world economy.

Exchanges have made this possible by :

• aligning their corporate strategies with the business potential

• training their staff and investing in infrastructure • boosting the commerce of finance with new telecom and

computer technologies • providing stimulus and improved risk management through

derivatives markets • supporting equity savings through pension and other retire-

ment schemes • participating in the reorientation of finance from bank

loans into securities• promoting the increase in cross-border investment and

trading

From the perspective of exchanges, this commercial expan-sion coincided with a broad trend in the last half of the 1990sto switch from a business structure based on broker coopera-tives with inside ownership to for-profit limited companieswith outside owners. For most of the Federation’s members,business objectives changed with this new governance form.The heightened commercial feel of this industry also affectedthose exchanges maintaining their mutual legal form, and theyhave proven themselves to be successful competitors. Thedynamism of these businesses is one reason for the qualita-tive difference in the role of exchanges in the 2000s : the mar-kets could not have grown in scale to the extent they did iftheir operations were not also of good quality – and seen tobe of good quality.

By the end of the 1990s, exchanges came to be identifiedwith the highly commercial spirit of the times. Exchangessymbolize capitalism, and are at the heart of the system. Thelevel of their activities gives an instant short-hand summary of entire nations’ socioeconomic health. It is onlynatural that these enterprises be managed as dynamic busi-nesses in their own right.

This document outlines some of the perspectives of the world’sregulated exchanges : with this heightened economic signifi-cance, the operators of bourses must have their needs under-stood by other financial actors and by government policy makers. These persons know best how to improve the marketsthey operate. Their professional responsibilities prompt themto step forward to be heard.

The Transformed Position of Exchanges

In December 1990, the World Federation of Exchanges (formerly FIBV) counted 38 members. The total market capi-talization of equities listed on these bourses was $ 9 400 bn,and the value of share trading for the year hit $ 6 211 bn.

By December 2001, the Federation had grown to 56 members.Total market capitalization had risen to $ 26 780 bn, afterreaching a high point in March 2000 of $ 36 286 bn. The valueof share trading for 2001 fell back to $ 41 225 bn, which wasquite a fall from the previous year’s $ 55 957 bn. Since thenewer members tended to operate smaller markets, this long-term growth trend took place mainly among existing members.

This translated into :

• growth in equity market capitalization over the period of285 %

• growth in trading volumes of 664 %• acceleration in the turnover velocity of shares from 66 % to

153 %, demonstrating the increase in liquidity provided onregulated exchanges

Enhanced business profitability, privatizations, IPOs, indexesand derivative products, and cross-border trading fed thistransformation. But the exchanges themselves were the actorswhich adapted, invested, participated and enabled this totake place.

The Stakes

By all measures, the health of an exchange is vital to aneconomy. As a percentage of gross domestic product, thevalue of equity market capitalization of Federation exchangesvaried from a low of 2 % to a high of 383 % at the end of2000, the last year for which the IMF’s GDP statistics havebeen provided.

The global average market capitalization for equities on mem-bers’ exchanges rose to a stunning 91 % of GDP in 2000. More-over, these assets include most of the world’s most highly prizedcompanies.

At the end of 1991, 25 980 foreign and domestic companieswere listed on member exchanges. Ten years later, at the endof 2001, this number had become 35 001. The world’s corpo-rate treasurers have voted in favor of this source of funding.

In 1999, companies and governments raised new capital onFederation markets amounting to $ 754 bn, and this increasedto $ 896 bn in 2000, even under difficult market conditions.Pending the final total, this did fall considerably in 2001, butexchanges remain a choice source of fresh capital for theworld’s enterprises and governments – and this change in thepriority of turning to equity financing looks set to stay. Eco-nomic reliance on exchanges is perhaps the most importantchange in finance over the last decade.

Public policy makers, corporations, and the saving public havecome to appreciate the importance of these figures – andwhen the numbers are shown in chart form as in the annex,the historical trend is striking.

Moreover, in many parts of the world, exchange index move-ments have come to be integrated into the rhythm of dailylife, every few minutes on the radio, at regular intervals ontelevision, and constantly on the Internet. The capital markets have given rise to considerable expansion of the specialized printed press, too. The names of broad equitymarket indices are commonly recognized as being of socialimportance. When the market moves more than a few per-cent up or down, it is big national news. When exchange trading is interrupted for whatever reason, that too is majornews. Clearly, a different kind of financial business has emergedon the scene. No other actor has such an affect on the public mind, and that, too, is meaningful.

This has been happening in many countries around the world,involving by far the greater part of the world’s economic life.

Exchanges’ centrality to social wealth creation is established.Corporate treasurers need to factor in their ability to tap thissource of cash by issuing securities, just as finance ministerstry to balance national budgets with their privatizations ofstate-owned businesses. Public awareness of the need to investhas prompted great individual interest in equities and related

exchange-traded products, too. A further benefit has been thebroadening of share-ownership, and with it the loosening ofmarket forces for better corporate governance practices.

What Exchanges Do : Fair Rules for Efficient Markets

Exchanges have a distinct identity within the financial services sector. They are not insurance companies, invest-ment firms, banks, or brokerages. They operate regulatedsecurities and derivative markets. These markets establishasset values through efficient price discovery, enabling thepublic to know how much companies are worth according tothe latest news and the most recent economic outlook.

Putting together rules, know-how and technology for efficient, transparent trading of assets worth nearly one yearof the world’s GDP is quite a responsibility; to succeed inmeeting that challenge is to build prosperity. Regulated securities exchanges provide the solutions. They are creatinggreater efficiencies across the value chain of the exchangeindustry, and diffusing ever more complex and better quality financial information to support the work of all actorsin the capital markets.

Having sketched the position of exchanges as central actorsin the global financial industry, this paper moves on to statesome of the business questions exchange operators face.A financial market behaves like a highly sensitive organismliving in a rich, particular biological environment. Operatingan exchange is therefore a proportionately complex business.Regulation helps make the markets more efficient, but muchalso depends on human talent and judgment, just as is thecase elsewhere in the financial services industry. Governmentsare involved as intimately in matters of public savings as arethe corporate issuers of securities and the investors them-selves; together with them, operators of exchanges must getthis business model right. Today, the size of this industryunderscores the national and international challenge that thefunctioning of these markets represents.

For price discovery to occur, the business of exchanges precedes the instant of trade order execution and extendswell beyond. Even if by law or custom the exchanges in everycountry do not operate these diverse activities directly, theirinvolvement in them is intimate. The bundle of related busi-nesses is what builds a coherent, secure market. The entirevalue chain must function smoothly, including :

THE SIGNIFICANCE OF THE EXCHANGE INDUSTRY (CONTINUED)

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• writing the rules for market activity• admitting intermediaries (banks or brokers) to act on the

central market• assuring the ability in-house to follow intermediary’s posi-

tions, and so establish enforcement of market rules• admitting securities to listing• assuring on-going disclosure of corporate information• setting up adequate IT and communications system facilities• diffusing of market information to a wide public• trading• assuring prompt clearing and settlement of orders• providing for securities registry, transfer agent, and deposi-

tary activities

In addition to equities, Federation members conduct the majority of the world’s on-exchange trading of government andcorporate bonds, derivative products, investment and exchange-traded funds, warrants, and convertibles. Also in the for-profit environment now established, exchanges may go furtherafield in search of good returns, like other businesses do.

The Business of Running Exchanges

Whether a cooperative or a for-profit company, exchangesmust serve their customers and earn money to stay in busi-ness and grow. This is what capitalism is about. This means :

• improving staff operations and competency• rewriting rules as know-how, technology, products and

opportunities gradually modify the market and create newchallenges

• scaling up IT and telecommunications systems • connecting markets to ever more players• enhancing surveillance and control functions in an

environment of growing complexity as concerns actors,instruments, and interaction between different types ofsecurities, often with cross-border involvement

• improving the information disclosed on companies andmarket data

• facing up to aggressive national and cross-border compe-tition

• investing reserves strategically• assuring a good return on capital

A growing number of exchanges have introduced the shares oftheir companies on the markets they operate, emphasizing atthe same time the for-profit and public nature of this industry.

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With this mix of questions in mind, it is notable that tech-nologies and efficiencies at exchanges have enabled them tolower unit costs over the 1990s. Total revenue growth hasbeen strong at 316 %, but it has also been remarkably lowerthan the 665 % increase in trading volumes. The benefits ofscale and technology were passed on to customers.

Challenges for Exchange Managers

There is a public good in operating an exchange, and managerscertainly recognize the importance of this. But bourses arenot the only segment of financial services to have this distinction, and the question must be kept in proportion.However huge the markets relative to the economy, in theend, exchanges are about running regulated businesses. Onbalance, one cannot have regulation without a prosperousbusiness environment, and one cannot have a prosperousexchange without clear rules and respect for them.

Intangibles matter to exchanges : their market-neutralposition, and the value of their reputation for fairness andtransparency in the conduct of trading. Managers do theirutmost to enhance the quality of these assets, for they arecommercial elements central in running the business.

The question is sometimes implied that the quality aspectsof the business, the assurance of regulatory services, is notentirely compatible with a for-profit environment. Yet allbusinesses must assume costs of quality for goods and services, whatever the industry. Curiously, at the end of 2001in many countries, exchanges are subject to particular questioning on this point, just as the market scale itselfdemonstrates the proper functioning of market mechanisms. Volume growth and reduced spreads demonstrate the enhancedoperating efficiency of exchanges.

The size of the exchange industry is small compared to theeconomic function of the markets operated. Including consolidated companies, Federation members at the end of2001 employed 17 703 people. The audited figures forDecember 2001 are not yet in, but members had a totalcapital base of USD 7.3 bn in December 2000. There is adisproportion between exchanges, insurance companies,banks, and investment firms; each has key financial functions to fulfill, including in the capital markets, butexchange managers now need to participate more fully inpublic policy debates when their business is discussed. The

THE SIGNIFICANCE OF THE EXCHANGE INDUSTRY (CONTINUED)

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MARKET CAPITALIZATIONAS A PERCENTAGE OF GDP

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TOTAL REVENUESOF FEDERATION EXCHANGES

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public policy agenda in most markets is disproportionatelyconcerned with issues of banking and insurance ; the figures demonstrate the need for greater focus on regulatedexchanges. Their successful evolution going forward can-not be taken for granted, and the experience of bourse managers must be put to use as a key tool in devising properpolicies.

Exchanges need independence and freedom to operate withinthe rules of the regulatory environment. Too much inter-ference by governments will impede the market function.The goal to pursue, the hard balance to find, will involveunleashing the full benefit of an exchange within the setrules of the local jurisdiction, remembering that there willnever be a situation of zero risk for investor or issues – andgovernments should not be trying for that. That simply isnot what financial markets are about, and even to implythat would give a poor sense of this business to many actorsinvolved in exchanges.

Out of ignorance of the complex mechanisms involved, or in an attempt to seize business opportunities, competi-tors make curious statements about exchanges. Too manyother actors speak about exchanges without the properknowledge and expertise that only the operators of marketsthemselves have acquired. Also, on occasion, experimen-tation with new rules and regulations in some markets,rather than planned adaptation to changing commercialconditions, has led to sharp falls in trading, and notablewidening in bid-ask spreads - the two sure signs that themarket has become less efficient. One truly must be carefulabout nurturing these complex businesses.

As a social responsibility, and equally as an essential partof their further business development, exchanges wish tocorrect inaccuracies in the discussions about regulated markets. They must take their proper place in financial policy debates. This place must be institutionalized andseen to be a normal part of capital markets work.

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NEW CAPITAL RAISED

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EXCHANGES' EQUITY BASE

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L E T T E R F R O M T H E S E C R E T A R Y G E N E R A L

U ntil the General Assembly ofmembers in October 2001, the

World Federation of Exchanges wasknown as FIBV, the name under whichthis association was founded 41 yearsago. FIBV came from the French abbre-viation standing for International Fed-eration of Stock Exchanges. It is thetrade organisation for regulated secu-rities and derivative markets, andrelated clearing houses and otherafter-trading service companies. TheWorld Federation of Exchanges is aninternational organisation comprisedof the world’s leading exchanges,which are committed to the highestlevels of market quality. It provides aforum for communication, analysisand debate among members. Its pur-pose is to facilitate the representa-tion, development of organised andregulated markets, and to meet theneeds of evolving capital markets inthe best interest of their users.

The update in name in 2001 was farmore than a switch from French toEnglish. The word "stock" wasdropped. While the historic origins ofthis industry were indeed in equitieslisting and trading, by the turn of thecentury the business lines of memberexchanges had spread broadly, andnotably into the derivatives area. The

Federation welcomes these commer-cial changes, and is adapting its pro-gram to accommodate the many newquestions now preoccupying the man-agers of member exchanges.

The label "member of the World Fed-eration of Exchanges" identifies eachmarket as having prescribed businessstandards, recognised as such by mem-bers, owners, and users of exchanges,as well as by regulators and supervi-sory bodies.Organised, regulated financial mar-kets do the best economic job of allo-cating capital on the largest possiblescale. From capturing orders to tradeor providing access for new companycapital offerings, and then carryingon through trading, reporting, set-tlement, and custody, member mar-kets have developed sound businesspractices offering investor protectionand efficient price discovery. Newtechnologies and competition stimu-late Federation members to make theirservices more efficient, cost effective,user friendly and reliable.

Sharing of business experience andknowledge among member exchangesis critical to the development of theindustry, especially in an increasinglycompetitive environment.

The Federation is a central referencepoint for the securities industry, andfor exchanges themselves, the mar-kets of choice. It offers memberexchanges guidance in their businessstrategies, and in the improvementand harmonisation of their manage-ment practices. It also works with pub-lic authorities to promote increaseduse of markets.

The World Federation of Exchange’sbusiness goals are :

• To demonstrate the role, func-tioning and integrity of regulatedmarkets;

• To maintain a platform for securi-ties markets professionals to discussissues of common interest, to iden-tify new approaches and solutionswhich enhance the competitive position of regulated markets, and todevelop programs which supportexchange operations, includingresearch papers, workshops, qualitystandards, and best practices;

• To deepen the co-operative rela-tionship with supervisory authoritiesand international public policy orga-nizations, in order to advocate thebenefits of exchange front-line self-regulation within the total regulatoryframework; and

• To support emerging exchanges intheir efforts to develop markets whichfunction according to this associa-tion’s member standards, thus con-tributing to global respect for the busi-ness practices of a well-run industry.

It is an honour and a privilege to workwith members towards such worth-while goals for the capital markets.To get there, it is a pleasure to intro-duce the entire team at the Secre-tariat. My colleagues are :

• Peter Clifford, Director• Renée Pouillon, Office Manager• Lorenzo Gallai, Statistician• Antoinette di Massa, Assistant• Francine Gallet, Assistant• Christine Garnier, Assistant

Thomas KrantzSecretary GeneralParis, March 2001

Thomas Krantz,World Federation of Exchanges


B O A R D O F D I R E C T O R S

2 February 2002

PresidentBolsa de Madrid Mr. Antonio J. Zoido, Chairman

Vice PresidentNew York Stock Exchange Mr. Richard A. Grasso,

Chairman & Chief Executive Officer

Working Committee ChairmanNew Zealand Stock Exchange Mr. William P. Foster, Managing Director

MembersBolsa de Valores do São Paulo Mr. Eduardo Brenner, Deputy Chairman

Chicago Board Options Exchange Mr. William J. Brodsky,Chairman & Chief Executive Officer

Copenhagen Stock Exchange Mr. Hans-Ole Jochumsen,President & Chief Executive Officer

Euronext Paris Mr. Jean-François Théodore,*Chairman & Chief Executive Officer

Hong Kong Exchanges and Clearing Mr. K. C. Kwong, Chief ExecutiveJSE Securities Exchange, South Africa Mr. Russell M. Loubser, Chief Executive Officer

Kuala Lumpur Stock Exchange Mr. Mohammed Azlan Hashim, Executive ChairmanLondon Stock Exchange Mr. Don Cruickshank, Chairman

National Association of Securities Dealers Mr. Alfred R. Berkeley, III, Vice ChairmanTokyo Stock Exchange Mr. Masaaki Tsuchida,

President & Chief Executive OfficerToronto Stock Exchange Ms. Barbara G. Stymiest,

President & Chief Executive Officer

* Serves as Federation Treasure

T H E W O R K I N G C O M M I T T E E

12

19 February 2002

Chairman

New Zealand Stock Exchange Mr. William P. Foster, Managing Director

MembersAmerican Stock Exchange Mr. Peter Quick, President

Athens Stock Exchange Mr. Socrates G. Lazaridis, Executive Vice President

Australian Stock Exchange Mr. Michael Roche, Executive General Manager, Market Services

Barcelona Stock Exchange Mr. José Maria Antúnez Xaus, General Manager

Bermuda Stock Exchange Mr. Gregory A. Wojciechowski, President & Chief Executive Officer

Bolsa de Comercio de Buenos Aires Dr. Edgar I. Jelonche, Chief Executive Officer

Bolsa de Comercio de Santiago Mr. Gonzalo Ugarte Encinas, Planning & Development Manager

Bolsa de Madrid Mr. Ramon Adarraga, Director of International Affairs

Bolsa de Valencia Ms. Lorena Litago, Responsible for Press and Communication, Market Promotion Dept.

Bolsa de Valores de Bilbao Mr. José Luis Damborenea, Chief Executive Officer & Member of the Board

Bolsa de Valores de Lima Mr. Federico Oviedo, General Manager

Bolsa de Valores de Lisboa e Porto - BVLP Mr. Manuel Alves Monteiro, President & Chief Executive Officer

Bolsa de Valores do Rio de Janeiro Mr. Marcelo Salgado, Director of Market Developmentand International Affairs

Bolsa de Valores do São Paulo Mr. Gilberto Mifano, Chief Executive Officer

Bolsa Mexicana de Valores Mr. Pedro Zorrilla Velasco, Chief Operating Officer

Bourse de Luxembourg Mr. Michel Maquil, Chief Executive

Bourse de Montréal Mr. Luc Bertrand, President & Chief Executive Officer

Budapest Stock Exchange Mr. Zsolt Horvath, Chief Executive Officer

Canadian Venture Exchange Ms. Maryn L. Sigurdson, Corporate Secretary

Chicago Board Options Exchange Mr. Richard DuFour, Executive Vice-President

Chicago Stock Exchange Dr. William J. Barclay, Senior Vice President,Strategic Planning/OTC Product Line

Colombo Stock Exchange Mr. Hiran Mendis, Director General

Copenhagen Stock Exchange Mr. Poul-Erik Skaanning-Jørgensen, Senior Vice President

Deutsche Börse Mr. Dirk Schlochtermeyer, Head of Market Policy

Euronext Amsterdam Ms. Leni Boeren, Executive Director Marketing

Euronext Brussels Mr. Vincent van Dessel, Markets Director

Euronext Paris Mr. Paul-François Dubroeucq, Director, International Relations


Helsinki Exchanges Mr. Jouni Torasvirta, Senior Vice President

Hong Kong Exchanges & Clearing Mr. Richard Peng, Head, China & International Development

Irish Stock Exchange Mr. Tom Healy, Chief Executive

Istanbul Stock Exchange Mr. Aril Seren, Senior Vice-Chairman

Italian Exchange Ms. Antonella Amadei, Advisor to the President& CEO for Global Relationship Development

Jakarta Stock Exchange Mr. Mas Achmad Daniri, President Director

JSE Securities Exchange, South Africa Ms. Nicky Newton-King, Director, New Business and General Counsel

Korea Stock Exchange Mr. Yu-Kyung Kim, Director, International Relations

Kuala Lumpur Stock Exchange Mr. Abdul Hamid Sh. Mohamed, Senior Vice President,Policy & Development Division

Ljubljana Stock Exchange Dr. Drasko Veselinovic, President & Chief Executive Officer

London Stock Exchange Mrs. Rhian Browning, Senior Manager, Global BusinessDevelopment

Malta Stock Exchange Mr. Alfred Mallia, Chairman

National Association of Securities Dealers Mr. Robert Aber, Senior Vice President & General Counsel

New York Stock Exchange Mr. Alain Y. Morvan, Senior Vice President, International Relations

Osaka Securities Exchange Mr. Minoru Shimabayashi, Director of Research Department

Oslo Børs Mr. Anders P. Brodin, Senior Vice-President, Head of External Relations

Philippine Stock Exchange Mr. Ernest Leung, President

Singapore Exchange Mrs. Ong Suan Ling, Senior Vice President

Stock Exchange of Thailand Mr. Kittiratt Na-Ranong, President

Stockholmsbörsen Mr. Simon Nathanson, Acting Chief Executive

SWX Swiss Exchange Dr. Richard T. Meier, Delegate for International Affairs

Taiwan Stock Exchange Corp. Mr. K. C. Peng, Senior Vice President, Dept. of InternationalAffairs

Tehran Stock Exchange Mr. Massoud Vakilzadeh, Head of International Affairs Department

Tel Aviv Stock Exchange Mr. Saul Bronfeld, Managing Director

Tokyo Stock Exchange Mr. Hiroshi Sakakibara, Head of Overseas Public Relations

Toronto Stock Exchange Ms. Barbara G. Stymiest, President & Chief Executive Officer

Warsaw Stock Exchange Dr. Wieslaw Rozlucki, President & Chief Executive Officer

Wiener Börse Dr. Erich Obersteiner, Member of the Executive Board

American Stock ExchangeAthens Stock ExchangeAustralian Stock ExchangeBarcelona Stock ExchangeBermuda Stock ExchangeBolsa de Comercio de Buenos AiresBolsa de Comercio de SantiagoBolsa de MadridBolsa de ValenciaBolsa de Valores de BilbaoBolsa de Valores de LimaBolsa de Valores de Lisboa e Porto - BVLPBolsa de Valores do Rio de JaneiroBolsa de Valores do São PauloBolsa Mexicana de ValoresBourse de LuxembourgBourse de MontréalBudapest Stock ExchangeCanadian Venture Exchange

Chicago Board Options ExchangeChicago Stock ExchangeColombo Stock ExchangeCopenhagen Stock ExchangeDeutsche Börse AGEuronext AmsterdamEuronext BrusselsEuronext ParisHelsinki ExchangesHong Kong Exchanges andClearingIrish Stock ExchangeIstanbul Stock ExchangeItalian ExchangeJakarta Stock ExchangeJSE Securities Exchange, South AfricaKorea Stock ExchangeKuala Lumpur Stock ExchangeLjubljana Stock Exchange

London Stock ExchangeMalta Stock ExchangeNational Association of SecuritiesDealersNew York Stock ExchangeNew Zealand Stock ExchangeOsaka Securities ExchangeOslo BørsPhilippine Stock ExchangeSingapore ExchangeStock Exchange of ThailandStockholmsbörsenSWX Swiss ExchangeTaiwan Stock Exchange Corp.Tehran Stock ExchangeTel-Aviv Stock ExchangeTokyo Stock ExchangeToronto Stock ExchangeWarsaw Stock ExchangeWiener Börse

T H E M E M B E R E X C H A N G E S

14

Queen Sophia and King Juan Carlos greeting Alain Morvan of the New York Stock Exchange;Jean-François Théodore of Euronext; and Eduardo Brenner of Bovespa during the Annual Meeting

World Federation of Exchanges


1 - This document replaces the 1995 FIBV Market Principles.2 - "Securities Market" as used in these Principles includes a market for

financial derivative products and means any entity that organizes, butdoes not itself provide, liquidity among multiple liquidity providers.

3 - "Exchange" means that entity which has direct administration overthe market, regardless of the way or form of market organisation andor the financial products traded.

4 - For the following "self-regulatory and government agencies" will be referred to as "regulator". The regulator can be totally based on self-regulation, a co-operative arrangement with the government agency or a governmentagency alone.

5 - "Market users" include intermediaries, customers, vendors of and subscribersto market information.

6 - See under 5 Trading.

M A R K E T P R I N C I P L E S 1

1. Purpose

The World Federation of Exchanges Market Structure BestPractices as set out here provides guidance as to the mini-mum level of organisation, regulation and supervision a secu-rities market2 needs to have in order to qualify as organisedmarket. They also serve as a checklist for those securitiesmarkets wishing to become a member of the World Federa-tion of Exchanges. Whilst the paper serves as the basis ofpreparing an application for membership, members arereminded that they need to maintain them on a continuousbasis, and be subject to disclosure and monitoring as agreedat the 1997 General Assembly.

Exchanges3 should be aware of, and will have to be respon-sive to, the directives and concerns of relevant self-regula-tory and government authorities4 which have jurisdiction overthem. They must ensure to the full extent of their authoritythe compliance of market users5 with the requirements of themarket and of its applicable laws, rules and regulations.

The following points should be addressed:

2. Organisation and Operations

Exchanges should have available and maintain adequate organisational infrastructure and operational resources toenable them to offer the proper tools for trading in securities.

a. Legal Status

The exchange should have the legal status of arecognised securities market in the country in which it isdomiciled. A national securities law should be enacted covering the exchange(s), its powers and obligations.

b. Statutes

The exchange should have properly draftedStatutes, at a minimum covering its governance, the com-position of the governing body, indications for constituentsfrom which council members are appointed/elected, its mission, and its rules and regulations.

c. Market participants

The requirements for market participants shouldcover: objective qualifications, experience, structure, capitaladequacy rules, disciplinary issues, and rights and obliga-tions. Foreign market participants should normally be allowed,adopting mutual recognition of World Federation of Exchangesmember market participants6. Traders should be authorisedto act only at the end of a structured training process andafter having passed a qualifying exam.

d. Monitoring of Market participants

On an on-going basis, the exchange should haveinfrastructure in place for the supervision for which is hasresponsibility, indicating the frequency of monitoring, thescope of its authority, actions to be taken in case of non-compliance, etc. The financial and trade reporting oblig-ations of market participants should have their formalbasis here. The exchange’s oversight should encompasscapital adequacy, position limits, collateral quantity andquality, internal compliance rules, market conduct andbehaviour, etc.

e. Organisational Structure

The organisational structure of the exchangeshould be formal and allow for the correct management offinancial market operations. The staff of the exchange needsto be fit and properly qualified for the job. A formalisedhuman resources activity should be established to attractand keep professional staff, avoiding the risk to operationsfrom high turnover.

f. Regulatory Infrastructure

At a minimum, the official exchange rules shouldinclude information on: trading, including transparency and reporting, listing, market participation, discipline and sanctions, clearing and settlement, and recourse procedures.


M A R K E T P R I N C I P L E S (CONTINUED)

16

g. Systems

The exchange should have systems in place thatare of sufficient capacity to ensure the operation of an orderlymarket and to handle its business activities. Calamity sce-narios and contingency plans must be drawn up, and back-up procedures tested on a regular basis.7

h. Funding of the Organisation

The financial soundness of exchange should be theresult of a sound business plan. It should show a positivetrack record for at least 3 years. The annual report of theexchange needs to be certified by an independent charteredaccountant, in compliance with International AccountingStandards (IAS), if necessary in the Notes to the Accountsor as a separate statement in addition to compliance withany different local standards.

3. Access to the Market

The market should be designed to operate in a manner equi-table to all who access it. Any differences in treatment amongusers, regardless of the means of access (electronic or other)must not be tolerated. Access to the market should not bearbitrarily granted, and no discrimination should be shown.

Procedures should be established such that market partici-pants adhere to the competence, integrity, financial sound-ness and authority, and that adequate supervision be in place.

Exchange rules and regulations must stipulate:

• terms and conditions for equal access to the market, includ-ing those to do with financial integrity and business ethics;

• the professionalism of intermediaries and their employees;• minimum capital requirements and solvency of inter-

mediaries;• compliance instruments that safeguard the standing and

credit worthiness of intermediaries;

• enforcement and disciplinary procedures, including thesanctions to be applied; and,

• management of conflicts of interest among and within market users.

4.Listing of and disclosure on traded financial products

Exchanges should require:

• that listed companies be of an adequate size and have suf-ficient shares in hands of the public to safeguard an orderlyand fair market;

• timely, and the widest possible disclosure of business andfinancial information materially affecting listed compa-nies;

• regular disclosure of financial information by listed com-panies; and,

• disclosure to investors of the nature, risk and investmentpotential inherent in the traded financial products.

Exchanges should work towards:

• regulatory co-ordination among markets where financialproducts are jointly listed, in order that there be a syn-chronised disclosure of information; and,

• the support of cross-border listing and trading.

The listing procedures, time schedule for the processing ofthe dossier, costs for the company, minimum size of capital-isation, and other requirements should be compiled in onerulebook, which is publicly available. In case listing respon-sibilities are shared with the supervisory agency, it shouldbe clear where the ultimate decision in the listing processlies. Foreign issuing companies should be subject to the samerules as the domestic ones.

The procedure to gain listing should be sufficiently long toassure that all the requirements of the Exchange have beenfully complied with, but not so long as to impair access tothe capital market.

1. See also technical Infrastructure, page 11.



5. Trading

The accountability of the Exchange to market users shouldbe described, especially in any agreements that seek to modify the distribution of responsibilities among actors.

Transaction audit trails should be available to investors andregulators; only the information to regulators will includenon-public information. Pre- and post-trade informationshould be provided on a timely basis.

The Exchange should be able to demonstrate to the regula-tor that the processing, queuing, and display of prices andquotations within the market are equitable to all classes ofparticipants.

The transparency of the market is a crucial element of fair-ness and must be assured at all times. Although markets mayoffer different degrees of transparency depending upon thebalance struck between transparency and liquidity, never-theless, whatever the structure transactions must be reportedimmediately to the exchange, with details as to price andvolume.

Exchanges should undertake:

• to promote well balanced transparency by publicly dis-closing transaction data;

• to establish and maintain trading rules to protect investors,such as "best execution" rules, regulatory trading halts,etc.

• to create transparency with respect to the capacity in whichthe intermediaries operate.

The market should allow for cross-border trading. Duplica-tive regulation of the accessed market by the authorities inthe jurisdiction in which it is located ("home country regu-lator") and those in the jurisdiction in which the accessingparty is located ("host country regulator") should be avoided.Foreign players should have identical rights - and obligations- as local players, provided their business attitude and finan-cial soundness are comparable to those required in the mar-ket of the access provider.

The basic principle should be that national supervisory agen-cies must respect each other’s efforts to assure that a secu-rities market complies with generally accepted investor

protection standards, such as disclosure, transparency andefficiency. This mutual recognition of each other’s regulatorystatus and professional competence requires a good under-standing of the mechanics and underlying approaches takenin that country.

6. Clearing and Settlement

The clearing and settlement facilities provided by theExchange, its subsidiaries or others must provide for the effi-cient, safe and prompt settlement of transactions within theinternationally accepted standards of the G-30 and ISSA, orbe better.

The Exchange will :

• make adequate arrangements for safe and timely clearing,and correct and final settlement of the transactions concluded on the market ;

• see to it that cross-border clearing and settlement activities are facilitated ;

• be instrumental in the development of national centralsecurities depositories, immobilisation, dematerialisationof securities, lending and borrowing contracts and arrange-ments;

• contribute to the standardisation and implementation ofsecurities industry processes;

• assure that ownership of securities should be explicitlyembedded in national law. A well-defined system of lawsrelating to property, contracts, securities, trusts, bank-ruptcy and taxation should exist.

7. Technical Infrastructure

The market IT systems should maintain adequate capacity tomeet the needs of market users. Back-up systems and contingency procedures to be followed in the event of an oper-ational failure are to be maintained on a current, ready basis.Before implementation and on a periodic basis thereafter, themarket and system interfaces should be subject to an objec-tive risk assessment to identify vulnerabilities, which may existin the system design, development, or implementation. Thesewould include the risk of unauthorised access, internal failures, human errors, attacks and natural catastrophes.

8.Risk Management

Regulators and the Exchange should consider any risk expo-sures pertinent to the system, including those arising frominteraction with related financial systems, domestic or abroad.This would include the foreign exchange markets, derivativemarkets, the banking market and payment systems.

To assure the financial integrity of the market and the abil-ity of its participants to fulfil their obligations as users, theExchange should have in place risk management tools, suchas position limits, margin requirements, minimum capitalrequirements, mark-to-market systems, etc.

9. The Settlement of Disputes, dealing with Complaints of Investors, and Arbitration Facilities

The Exchange should put facilities in place which offer effec-tive treatment of disputes and complaints from investorsregarding the behaviour and business conduct of intermedi-aries. These should be as simple and expeditious as possi-ble, within the limitations of national law.

10. Supervision, Surveillance & Enforcement

The Exchange must assure that mechanisms are in place toensure that the information necessary to conduct adequatesurveillance of the market for supervisory and enforcementpurposes is available on a timely basis.

The securities regulatory agency must be established with broadinspection and enforcement authority, and adequate oversightover the players in the market. Its enforcement of applicableregulations must be transparent. In case of a division of regu-latory responsibilities between the Exchange and the regula-tor, the responsibilities and powers of each party should be for-malised and cover the entire area to be supervised.

Markets, which have a separate banking supervisor, shouldhave a clear separation of responsibilities, in the event that banks may be actors on the securities markets. Regu-latory co-ordination between the regulators should be fostered.

The Exchange should report to the regulator when it becomesaware that reasonable grounds exist to suspect that a mar-ket user may have violated the jurisdiction’s laws, or its inter-nal rules and regulations.

Records made or received by the Exchange stemming fromthe operation of its trading system, relating to financial state-ments, and data regarding indications of market interest,quotations, orders, and trades in the system itself should allbe preserved for a reasonable period of time, in most instancesmeaning many years. These should be furnished promptlyupon request by the relevant regulator.

11. Investor Protection

Specific rules and regulations, like on disclosure and trans-parency, that serve to protect investors should be in place.These include guarantees such as compensation funds, insur-ance policies or their equivalent. If the Exchange or a relatedorganisation holds or safeguards funds intended to guaran-tee the clearing of trades, or to compensate investors in theevent of the insolvency of a member of the market, proce-dures and controls should be implemented to assure the avail-ability of those funds. These funds are on stand-by as a lenderof the last resort to the market.

A specific regime should be in place for staff of the Exchangeand the clearinghouse/depository, to avoid conflicts of interest and insider trading. Comparable rules should be inplace for all other users of the market. Insider trading andother forms of unfair markets should be prohibited, eitherby law or code of conduct, with adequate enforcement toolsavailable.

Brokers and banks must assure absolute segregation betweenclients’ money and their own accounts, and respect the priority in which client orders are executed.


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8 - The IOSCO Principles (see Annex 1.) were promulgated by IOSCO at its Santiago, Chile, November 12-15, 1990 meeting when the Presidents Com-mittee of IOSCO approved a Resolution. The Resolution called upon allmembers of IOSCO to recognize the IOSCO Principles as expressing basicstandards of business conduct for financial firms, to implement them

through their regulatory structure and effective supervisory arrangements, and to tryto promote the IOSCO Principles in their own countries. Each IOSCO member was leftfree to decide whether to implement the IOSCO Principles in the form stated by IOSCO,or to reflect them in its own principles adapted to local circumstances.


12. Business Conduct

One of the most important parameters for regulated marketsis the level of investor confidence achieved through both thenational legal environment and the market regulatory infra-structure. An important element of investor confidence isthe fair treatment of the customer. This section elaboratesthe IOSCO International Conduct of Business Principles (theIOSCO Principles8) and puts them in the context of markets,their participants and customers. It aims at offering a bench-mark of best practice against which members which haveexisting codes or formal regulations could test their practiceand perhaps revise their codes.

Obligations that may be imposed on listed companies, theiremployees, or investors are not covered here.

a. Honesty and Fairness

A stock market’s pricing system being its key func-tion, members of the financial community should honour theintegrity of the price formation mechanism.

Market participants should go further than avoiding misleading or deceptive acts or representations.They should refrain from any action that would hinder ordisrupt the fair and orderly functioning of the market. Theyshould not spread groundless or false information about listedissuers and refrain from any activities designed to misleadothers about the true state of the market. Therefore, con-sideration should be given to outlawing specific manipula-tive practices, such as trades that involve no change of beneficial ownership or trades that give a false appearanceof activity.

Although manipulation of prices (including insiderdealing) may be prohibited by statutory law as well as exchangerules, specific trading strategies may not be interdicted. Inpermitting new trading strategies, stock markets should takeinto consideration the integrity of their pricing mechanisms,provided, however, that such consideration should not be anexcuse for anti-competitive decision-making.

b. Diligence

The diligence required in effecting securities trans-actions is best execution of customer orders. This involves exe-cuting agency orders promptly, and if a market order, at thebest available price. Charges should be an agreed upon, or elsebe based on a customary, commission that is fully disclosed.Diligence also involves executing net trades or principal ordersat a price closely related to the market price, especially whereoff-market trading is permitted and disclosing, as may be appro-priate to the marketplace, the basis of the mark up or markdown to the customer. Whether the firm is acting in its capac-ity as principal or agent should also be disclosed to customers.

Recommendations by market participants or theiremployees to customers as to the purchase or sale of secu-rities should be based on adequate and reliable informationabout the issuer and the nature of the financial instrument.An underwriter should exercise due diligence with regard toan issuer's business affairs and financial condition whenpreparing an offering.

Where an involuntary sale of a customer's securi-ties must be made (due to an unanswered margin call or forother reasons), the market participant should conduct thatsale with skill and due care to follow market pricing.

c. Capabilities

Consideration should be given to what qualifica-tions Exchanges should impose for membership, and for thequalifications of employees. At the very least, individual market participants or their employees should be fit andproper persons without any record of dishonest or seriouslyfraudulent activities. Professional training should be expectedand competence appropriate to a person's professional posi-tion should be demonstrated.

Exchanges should have financial responsibilityrules for market participants. Market participants shouldadhere to such rules in a manner that does not jeopardisecustomer funds or securities held as custodian or the abilityof a market participant to complete transactions with other

market participants. Market participants should be requiredto monitor and calculate their financial position with suffi-cient frequency to remain in compliance with market ruleson capital adequacy and solvency.

d. Information about Customers

This principle should embrace not only the require-ment to obtain such information as may be necessary to rec-ommend suitable investments to a customer, but Exchangesmay wish to specify the type of the documentation to fulfilsuch a requirement. This is particularly important where theclient has a fiduciary role, for example, a trust or estate orpension fund. Circumstances under which firms exercise dis-cretionary trading powers should be defined, and it shouldbe made explicit that such trading gives rise to other spe-cial fiduciary obligations.

e. Information for Customers

A confirmation of each transaction should be sentto customers, including note of such information as may beappropriate to confirm fair dealing. There should be disclo-sure of such facts as may impair a firm's independence in itsdealings with customers. Market participants should keepand maintain a detailed record of each trade, in order to beable to respond to customers or the Exchange concerningbest execution.

A market participant should disclose its financialcondition to customers upon request.

f. Conflicts of Interest

The increased complexity and sophistication of thesecurities business, along with the deregulation of the indus-try, has led to more numerous conflict of interest situations.Conflicts need to be managed in such a way that customersare not at a disadvantage. The most common conflicts includethose between a market participant's investment banking,trading, research, mergers and acquisitions advisory business,and lending activities. Where feasible, conflicts should bemanaged by obtaining the informed consent of customers toa transaction. In addition, the management of conflicts maybe ameliorated by the creation of appropriate Chinese walls.

Market participants should be especially sensitive to the con-flicts that may exist between their trading activities andother commercial operations. Recommendations to customersmust be based on the interests of customers and not be madeto increase or reduce a market participant's trading position.Market participants and their employees cannot be permit-ted to effect trades for their own accounts ahead of cus-tomers' orders.

g. Compliance

Market participants should ensure that their part-ners or officers and directors are sufficiently active in theaffairs of the firm to demonstrate their compliance with statu-tory and self-regulatory obligations.

Firms should develop systems for the supervisionof accounts of employees and compliance with applicableregulations.

Rules of conduct for Exchange staff members aswell as employees from market participants should be for-mulated. A system for reporting of employee securities trans-actions should be put in place by Exchanges and market par-ticipants. Such a system should include the need for priorconsent by market participants for employees to maintainaccounts of any other market participant.

Market participants should keep accurate anddetailed records and ensure that all reports to be made arehonest. Market participants should conform to the just andequitable principles of conduct embodied in exchange rulesand commonly practised in the marketplaces in which theyconduct business.

13. Transparency

a. Statistics

The market should have a statistics function which allowsit to gain insights into the trading activity, activity on theprimary market, indices, etc. The methodology used in com-piling the statistics should be clearly explained.


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b. Market Information

The Exchange should have systems and proceduresin place assuring that important information related to listedcompanies and of a price-sensitive nature be distributed assoon as possible to all market participants. Pre- and post-trade information should be available for market participantsand supervisors. Selected market data should be available tothe public, either through the traditional media or using modern communication tools.

c. Trading

The trading methodology should be transparent,in accordance with principles of fairness and equality andprinciples for the protection of investors. Principles like"time/price" priority, equitability and integrity must beadhered to.

The trading activity should be checked constantly by audit trails, stock watch systems, etc. on a real-time basis ifpossible. Investors should have access to public data, in orderto verify that their orders were executed at a fair price.

14. Foreign Investment

In the event that foreign investors are not allowed to tradedomestic securities, and domestic investors are unable totrade foreign securities, a time plan should exist for the abolition of existing restrictions, including the authoritiesconcerned.

There should be no approval needed for foreign investment ;no inward or outward foreign exchange remittance restric-tions that cause delays; no special classes of shares for foreign investors; no or minimal restrictions on the foreignownership of home market securities.

The entire financial market must observe banking and otherfinancial rules and regulations that exist for the preventionof money laundering and similar misuse of the financial mar-kets to the detriment of their integrity and honesty.

15. Compliance with the Federation recommendations

Members and candidates for membership of World Federa-tion of Exchanges are obligated to bring their business oper-ations in line with these recommendations as rapidly as isfeasible, and to assure that they remain in line or becomeeven better.

The Market Principles were reviewed at the 1998 GeneralAssembly.

Annexe 1: The IOSCO Principles

The Principles recommended by Iosco are :

1. Honesty and FairnessIn conducting its business activities, a firm should acthonestly and fairly in the best interests of its customersand the integrity of the market.

2. DiligenceIn conducting its business activities, a firm should actwith due skill, care and diligence, in the best interests ofits customers and the integrity of the market.

3. CapabilitiesA firm should have and employ effectively the resourcesand procedures which are needed for the proper perfor-mance of its business activities.

4. Information about CustomersA firm should seek from its customers information abouttheir financial situation, investment experience and invest-ment objectives relevant to the services to be provided.

5. Information for CustomersA firm should make adequate disclosure of relevant mate-rial information in its dealings with its customers.

6. Conflicts of InterestA firm should try to avoid conflicts of interest, and whenthey cannot be avoided, should ensure that its customersare fairly treated.

7. ComplianceA firm should comply with all regulatory requirementsapplicable to the conduct of its business activities so asto promote the best interests of customers and the integrityof the market.

PREAMBLEWhereas it was considered beneficial to have a more formalorganization of organized stock exchanges, the AmsterdamStock Exchange, the Brussels Stock Exchange, the LondonStock Exchange, the Luxembourg Stock Exchange, the MadridStock Exchange, the Milan Stock Exchange, the Paris StockExchange, the Vienna Stock Exchange, the Association of German Stock Exchanges and the Association of Swiss StockExchanges have decided to create an International Federa-tion of Stock Exchanges. The official creation date was October 12-13, 1961.

The Statutes in the present version read as follows :

ARTICLE 1CREATION AND TITLE OF THEFEDERATIONAn International Association is incorporated under the pro-visions of the 1901 Law on Associations (France) and namedthe "World Federation of Exchanges". The Federation was for-merly known as the (French) "Fédération Internationale desBourses de Valeurs" or (English) "International Federationof Stock Exchanges", often referred to as "FIBV". The WorldFederation of Exchanges is the continuation of that samelegal entity.

ARTICLE 2PURPOSE1. The purpose of the Federation is to contribute to the devel-

opment, support and promotion of organized and regu-lated securities markets to meet the needs of the world'scapital markets in the best interest of their users.

2. The Federation is a not for profit organization.

ARTICLE 3DURATION AND HEAD OFFICE1. The Federation is created without limit as to time.2. The registered office of the Federation shall be located in

Paris.

ARTICLE 4FORM OF MEMBERSHIPMembership in the Federation shall only take the form of fullmembership. Members shall be entitled to vote at the General Assembly.

ARTICLE 5APPLICATION FOR MEMBERSHIP1. Applications for admission to membership may be made

by a stock exchange. The word "stock exchange" means,the stock exchange itself, if it is a legal entity, the governing body of the stock exchange if not a legal entity,and any other form of organized market deemed by theFederation to be equivalent of a stock exchange.

2. All applications for membership must be addressed to thePresident.

3. Acceptance or rejection of an application for Membershipshall be a matter for the decision of the General Assem-bly which shall not be obliged to give any reason for itsdecisions.

4. Membership shall become effective following the decisionof the General Assembly and after the candidate hasaccepted and countersigned the Statutes and the Inter-nal Rules.

5. In the event of the rejection of an application, no furtherapplication shall be accepted from the applicant so rejectedfor a period of three years from the date of notification ofsuch rejection.

S T A T U T E S

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Pedro Rodriguez Ponga, Past President and one of the founders of FIBV and Past President of the Madrid Stock Exchange,welcoming delegates to the Annual Meeting



ARTICLE 6SUSPENSION OF MEMBERSHIP1. If a Member has acted or may act or is identified or may

be identified with particular circumstances, policies orpractices, in such a manner as seriously to prejudice theinterests of the Federation, and not to take immediateaction would further seriously prejudice the interests ofthe Federation, the President may suspend the memberafter consultation with the Board of Directors.

2. A suspension imposed by the President takes effect imme-diately but expires at the conclusion of the next GeneralAssembly, unless confirmed and extended to a time specified by the General Assembly.

3. A suspended Member loses its voting right. Members remainaccountable for all obligations of membership.

ARTICLE 7TERMINATION OF MEMBERSHIP1. Membership shall be terminated by a declaration of

resignation or by expulsion.a. Any declaration of resignation must be addressed to

the President by registered letter and shall becomeeffective two weeks after receipt of the letter.

b. Any decision in regard to an expulsion from member-ship shall be taken by the General Assembly, after theMember concerned has had the opportunity to com-ment. Such decision shall be notified by registered letter sent by the President to the Member concernedand shall be immediately effective.

2. A Member resigning or being expelled will be obliged to discharge all financial obligations for which it is liableat the date when the resignation or expulsion becomeseffective.

3. The resigning or expelled Member shall have no claim onthe assets of the Federation.

4. In the event of a resignation or an expulsion, no applica-tion for renewed membership shall be accepted from the resigned or expelled Member for a period of three years from the date of notification of such resignation orexpulsion.

ARTICLE 8FINANCIAL OBLIGATIONS OF MEMBERS1. All Members shall make such financial contributions to the

Federation as are set by the General Assembly.2. In case of termination of membership during the Federa-

tion's financial year, no refund will be made of paid-upfinancial contributions.

ARTICLE 9ORGANIZATION OF THE FEDERATIONThe organization of the Federation shall consist of :

a. The General Assembly (Art. 10-12)b. The Board of Directors (Art. 13)c. The Working Committee (Art. 14)d. The President and Vice-President (Art. 15)e. The Treasurer (Art. 16)f. The Secretary General (Art. 17)

ARTICLE 10GENERAL ASSEMBLY, COMPETENCE AND MEETINGS1. The General Assembly is the deliberative and ultimate

decision-making body of the Federation, responsible forapproving the policy of the Federation. In particular theGeneral Assembly is competent for the :

Queen Sophia and King Juan Carlos with Antonio Zoido, President of the World

Federation of Exchanges and the Madrid Stock Exchange

during the Annual Meeting

a. amendments of these statutes ;b. admission for and expulsion from membership ;c. confirmation and extension of suspension of member-

ship ;d. approval of the budget and the accounts ;e. appointment of the External Auditor ;f. fixing of the financial contribution of Members ; and,g. election of the President, Vice-President, members of

the Board of Directors and the Chairman of the Work-ing Committee.

The above-mentioned powers may not be delegated.2. An ordinary meeting of the General Assembly shall be held

at least once in each period of two years.3. An extraordinary meeting of the General Assembly shall

be held at the initiative of the President, or if one-fifthof the number of Members so request of him in writing,citing the items to be discussed at such a meeting. In thelatter case, the extraordinary meeting shall be convenedby the President within three months of the receipt of sucha request. The President shall decide when and where anextraordinary meeting is to be held.

4. A meeting of the General Assembly shall be convened onthe authority of the President by letter giving at least sixweeks' notice of the meeting. Such letter shall specifywhere and when the meeting is to take place and shall in-clude a provisional agenda. The President is authorized,in case he is of the opinion that emergency circumstancesso require, to reduce the period of notice, but not to lessthan two weeks.

5. Meetings of the General Assembly shall be presided overby the President.

ARTICLE 11GENERAL ASSEMBLY, PARTICIPANTS

1. The delegation of a Member may not comprise more thanthree persons without the permission of the President.Any Member not attending a meeting of the General Assem-bly may appoint another Member as his representative bywritten proxy.

2. The President may allow any person to be present at a meeting, if that person's participation is held to be desirable.

ARTICLE 12GENERAL ASSEMBLY, QUORUM AND VOTING1. The quorum of the General Assembly shall be reached when

two-thirds of the number of Members are present or represented.

2. Each Member shall be entitled to one vote. When a voteconcerns an expulsion of membership, the Member in ques-tion shall not be entitled to vote.

3. Any decision in regard to an application for membershipor expulsion shall be taken by secret ballot ; in all othercases, the voting shall be open, except as otherwise decidedby the General Assembly.

4. If not otherwise provided herein, decisions shall be takenby a simple majority.

5. A majority of two-thirds of votes cast by the Members pre-sent or represented is required for the admission to andexpulsion from membership, and for the approval of thePresident and the Vice-President. A majority of four-fifthsof the votes cast by the Members present or representedis required for amendment of the Statutes and the disso-lution of the Federation.

6. In cases requiring only a simple majority, the vote may,on the President's initiative, be made by mail, save thatany Member may ask that the vote be postponed until thenext meeting of the General Assembly. The vote shall thenbe so postponed if half of the Members present or repre-sented agree.

S T A T U T E S (C O N T I N U E D)

24

Antonio Zoido, President of the World Federation of Exchanges and the Madrid Stock Exchange,with Peter Clifford of the World Federation of Exchanges during the General Assembly



ARTICLE 13THE BOARD OF DIRECTORS1. The Board of Directors is the executive council of the

Federation and is competent for thea. development of Federation policies ;b. definition and the choice of the tasks and projects to

be assigned to the Working Committee ;c. preparation of meetings of the General Assembly and

drawing up the agenda ;d. major administrative decisions of the Federation ;e. election of the Treasurer,f. appointment of the Secretary General ; andg. approval of the creation of subcommittees.

2. The Board of Directors is answerable to the General Assem-bly in respect of the discharge of the responsibilities citedunder section 1 of this Article.

3. The Board of Directors shall consist of fourteen membersas follows : The President, the Vice-President and the Chair-man of the Working Committee shall be members ex offi-cio ; the remaining eleven members of the Board of Direc-tors shall be elected by the General Assembly in accordancewith the provisions of the Internal Rules.

4. The members of the Board of Directors shall each serve fora term of two years, which may be renewed.

5. Each member of the Board of Directors may name an alter-nate, subject to the approval of the President, to attenda meeting of the Board of Directors in his absence.

6. The Board of Directors shall be convened by the Presidentwhenever he deems it necessary, but at least three timesa year.

7. The Board of Directors shall be presided over by the President.

8. The President may invite representatives of other Mem-bers to attend the meetings as well as any other personshe deems necessary.

ARTICLE 14WORKING COMMITTEE1. The Working Committee shall :

a. make proposals for studies and projects to the Boardof Directors ;

b. study and report on questions assigned to it by the Gen-eral Assembly and the Board of Directors ;

c. create such subcommittees, subject to approval by theBoard of Directors, as are necessary to accomplish thetasks as assigned to the Working Committee by theBoard of Directors ;

d. provide for a forum for exchange of information anddiscussion of topical subjects.

2. The Working Committee shall report to the Board of Direc-tors on each of the questions it has studied.

3. The Working Committee shall consist of representatives ofthose Members who have notified the Chairman of theWorking Committee of their commitment in becoming amember. Each Member may be represented by only onedelegate.

4. In accordance with the Internal Rules, the Chairman ofthe Working Committee, shall be proposed by the Presi-dent for election by the General Assembly for a term oftwo years, which may be renewed .

5. The Working Committee shall be convened by the Chair-man as often as he deems it necessary, but at least twicea year.

6. The Chairman of the Working Committee may allow anyperson to be present at a meeting, if his participation isheld to be desirable.

ARTICLE 15PRESIDENT AND VICE-PRESIDENT1. The President shall be the chief executive of the Federa-

tion and, as such, shall be the spokesman for the Federa-tion, responsible for executing the decisions of the Federation.

2. The President and the Vice-President shall hold office fora period of two years, which may be renewed.

3. The Members invited to hold the offices of President andVice-President, shall nominate a person that representsthe Member for approval by election by the General Assem-bly. The person must accept this responsibility on behalfof the Member.

Robert Aber, NASD ;Panayotis Alexakis,Athens Stock Exchange ;and Antonella Amadei,Italian Exchange.All three are members ofthe Working Committee

4. The Vice-President shall assume the functions of the Presi-dent in case of absence or incapacity of the latter. In theabsence of both President and Vice-President, the seniorfunctioning member of the Board of Directors as deter-mined by the Board of Directors shall take the chair atmeetings.

5. The nomination procedures are laid down in the InternalRules.

ARTICLE 16TREASURER1. The Treasurer shall be responsible for the supervision of

the treasury, more specifically the investments.2. The office of Treasurer shall be held by one of the mem-

bers of the Board of Directors for a period of two years,which may be renewed.

ARTICLE 17SECRETARY GENERAL1. The Secretary General shall be responsible for the adminis-

tration of the affairs of the Federation.2. The Secretariat shall be at the registered office of the

Federation.3. The Secretary General is the head of the Secretariat.4. The Secretary General shall make the preparations for the

meetings of the General Assembly, the Board of Directorsand the Working Committee. He shall attend such meetingsand be responsible for the minutes. He shall be responsiblefor monitoring of the activities or reports with which a Mem-ber any other person may have been en-trusted. He shallbe responsible for acquainting himself with studies, dis-cussions or decisions at an international level, that mayhave a bearing on the Federation; if necessary, he shall orga-nize the circulation of such information to the Members.

5. The Secretary General shall keep the records of the Federation.6. In case of his absence or incapacity, the Secretary

General, shall be substituted by a person designated bythe President.

ARTICLE 18COMPETENCE OF SIGNATURE1. The Federation shall be bound by the joint signatures of

the President and the Secretary General, or by their respec-tive substitutes.

2. The Board of Directors may decide that notwithstandingthe rule stated in section 1 of this Article, the Federationshall be bound in certain specified cases by the signatureof one or more persons duly authorized.

ARTICLE 19FINANCES1. The financial statements of the Federation are to be audited

by an External Auditor appointed by the General Assembly.2. The financial year of the Federation runs from 1 January

to 31 December.3. The expenses of the Federation shall be met in the man-

ner laid down by an Internal Rule.

ARTICLE 20AMENDMENTS TO THE STATUTES1. Any amendment to the Statutes may be made only on con-

dition that it has been previously included in an agendaof the General Assembly circulated at least two monthsbefore the day of the meeting.

2. A decision of the General Assembly concerning an amend-ment to the Statutes reached in accordance with theStatutes shall be binding upon all Members, except inthose cases where contrary to national law.

ARTICLE 21DISSOLUTION OF THE FEDERATIONThe dissolution of the Federation and the manner in whichit takes place shall be decided in accordance with the regulations of amendments to the Statutes. In case of dissolution, the statutory bodies referred to in Article 9 willcontinue to function for so long as is necessary for that function.

ARTICLE 22GENERAL PROVISIONFor the interpretation of these Statutes the French versiononly shall be definitive.

S T A T U T E S (C O N T I N U E D)

26



ARTICLE 1PRELIMINARY SURVEY OF MEM-BERSHIP CANDIDATE

1. The Secretariat shall conduct a preliminary survey of astock exchange which has expressed its intent to applyfor membership.

2. The preliminary survey shall be made on the basis of cri-teria developed by the Federation with respect to the eco-nomic significance, statutory and self-regulatory frame-work, and rules and regulations adopted by the exchange,as well as other matters deemed necessary by the Secre-tary General.

3. The Secretary General shall report to the Board of Direc-tors on the results of the preliminary survey.

ARTICLE 2PROCEDURE FOR ADMISSIONTO MEMBERSHIP1. Any application for admission to membership must be

accompanied by the following documents :a. a copy of the Articles of Association and Bylaws of the

applicant, or their equivalent, in addition to evidenceof being of good standing ;

b. an undertaking to produce all documents which maysubsequently be required for consideration of the appli-cation for membership. The applicant may be requiredto provide a translation of such documents in the English language.

2. The Board of Directors shall decide, based on a prelimi-nary survey carried out by the Secretary General, whetherthe application procedure can be started.

3. Upon the positive decision of the Board of Directors,the President shall designate at least two Members toexamine the application and prepare a report to the General Assembly, on the basis of a report to be writ-ten by the applicant in co-operation with the SecretaryGeneral.

4. The President shall notify the decision of the GeneralAssembly to the applicant.

ARTICLE 3AGENDA OF THE GENERALASSEMBLY MEETINGS

1. Documents pertaining to the items mentioned on the pro-visional agenda shall be transmitted to each delegationno later than three weeks before the meeting.

2. Subsequent to the issue of the provisional agenda, if Mem-bers wish to add items thereto, such items shall be sub-mitted in writing to the President at least two weeks beforethe date fixed for the meeting. The acceptance of suchitems shall be at the sole discretion of the Presidency. Ifaccepted, these items and any related documents shall beforwarded immediately to each delegation.

3. In case the period of notice of the meeting of the GeneralAssembly is reduced by the President (see Art. 10 par. 4of the Statutes), proposals from Members may be sub-mitted in writing to the President up to the beginning ofthe meeting.

4. Proposals not previously circulated to delegations mayonly be discussed with the agreement of the President ofthe meeting, or of the majority of the Members present atthe meeting, and in such case proxies shall be disregarded.

I N T E R N A L R U L E S

Hans-Ole Jochumsen and Hans Hansen of the Copenhagen Stock Exchange with George Möller of Euronext Amsterdam


ARTICLE 4NOMINATION PROCEDURES

1. President and Vice-PresidentAny vacancy in the office of President and/or Vice President elected by the membership shall be filled by theaffirmative vote of a simple majority of the membershipin accordance with the provisions of article 12 and 13 ofthe Statutes. The President and Vice President do not need to be members of the Board of Directors prior to theirelection.

Once elected, the President chairs the Board of Directors. The President and Vice-President are to be selected fromdifferent time zones rotating around the globe, and arenot included in the time zone allocation for the region inwhich his/her exchange is located.

The Board of Directors shall draft a profile for the idealcandidate, taking into account the basic rules as men-tioned above. It will inform members of the profile andshall invite members to nominate in writing candidatesfor President and Vice President to be voted at the General Assembly. Nominations will be submitted to theSecretariat at least 12 weeks before a General Assembly.

Each nominee member shall put forward a person who, inthe opinion of the Board of Directors, is eligible for elec-tion to the office for which he is nominated, fits the pro-file description, and has accepted to be nominated.

Upon receipt of the report of the Board of Directors, theSecretary General shall notify members of the names ofthese nominees. The names shall be arranged in alpha-betical order and brought to the attention of members atleast 6 weeks prior to the General Assembly at which thevoting will take place.

2. Board of Directors1. Geographical representationThe Board of Directors is composed of 14 members dividedover 3 time zones :• The President, Vice President and Chairman of the Working Committee are "ex officio" members and have a2-year rotation scheme of their own.• Of the remaining 11 positions, each time zone has anallocation of four seats. The Chairman of the Working

Committee is included in the time zone allocation for theregion in which his/her exchange is located.The entire membership nominates and votes for candidatemember exchanges for all seats. Voting will take place atthe General Assembly. Members will have as many votesas there will be vacancies organised by time zone. There-fore, members have a maximum of 4 votes per time zoneto be cast, totalling 11 in the event that the entire Boardof Directors were to be elected, plus the President, VicePresident and Chairman of the Working Committee.2. Criteria for members of the Board of DirectorsThe nomination criteria below have to be met to qualify asa candidate for membership of the Board of Directors. Thesecriteria will be re-evaluated on a regular basis. They are :• Actively support the World Federation of Exchanges asmember, with a track record of at least 3 years and a solidreputation;

• Demonstrate a commitment to developing industry stan-dards and best practices, to exercising leadership in worldcapital markets, and to making resources available toachieve the World Federation of Exchanges mission;• State why the member wants to serve on the Board ofDirectors, and what it plans to contribute;• Whatever its trading forms and structures, the membermust stand out with respect to market organisation,investor education and protection, relations with regula-

I N T E R N A L R U L E S (C O N T I N U E D)

Wieslaw Rozlucki,Warsaw Stock Exchange, talking with Alfred Berkeley III of the NASD at the Annual Meeting in Madrid

28



tory authorities, issuer relations, pricing efficiency, product development, and so on;• The member should have an exemplary conduct, in thatit continuously complies with all membership require-ments, including the observance of recommendations andbenchmarks where applicable; and• Trading volume is not an essential criterion, only theoverall quality of the market. Merit is more important thangeography and size.

3. ProcedureEvery year, two members of the Board of Directors per timezone will retire, and these positions become open for re-election, for a total of six in all. This includes the slottaken by the Chairman of the Working Committee. A vacancyon the Board of Directors shall be filled by the affirmativevote of a simple majority of the membership in accordancewith the provisions of article 12 and 13 of the Statutes.

Before any vacancy is filled, the Board of Directors shalldraft a profile for the ideal candidate, taking into accountthe criteria as mentioned above. The President will invitemembers in writing to suggest nominees.

Each nominee member shall put forward a person who, inthe opinion of the Board of Directors, is eligible for elec-tion to the office for which he is nominated, complies withthe criteria, and has accepted to be nominated.

Upon receipt of the report of the Board of Directors, theSecretary General shall notify all members of the namesof these nominees. The names of the persons shall bearranged in alphabetical order and brought to the atten-tion of members at least six weeks prior to the GeneralAssembly at which the voting takes place. Members haveas many votes as vacancies are to be filled. Voting will beby secret ballot.

3. Chairman of the Working CommitteeA vacancy in the office of Chairman of the Working Committee shall be filled by the affirmative vote of a majority of the membership of the Working Committee, inaccordance with the provisions of article 14 of the Statutes.

Before the vacancy is filled, the outgoing Working Committee Chairman shall draft a profile for the ideal can-didate. Subsequently, members of the Working Committeemay submit the name of a person to fill the vacancy inaccordance with the profile, and taking into account theperson’s activity as member of the Working Committee.

A list of candidates who have accepted to serve will becirculated to members of the Working Committee. At ameeting of the Committee, election of the final candidatewill take place. The candidate so elected will be the oneto be proposed by the President, with his prior approval,to the General Assembly in accordance with article 14 ofthe Statutes.

ARTICLE 5FINANCES1. The Secretary General shall prepare a draft budget for

the annual expenditure of the Federation. This draft budgetshall be submitted to the General Assembly by the Presidenton behalf of the Board of Directors. The President shall beresponsible for the finances of the Federation which shall beadministered by the Secretary General, under his direction.

2. The Secretary General shall report monthly to the President and Treasurer on the financial position of theFederation, including the major money movements andthe investment portfolio.

3. The Secretary General shall report to the Board of Direc-tors on the quarterly results set off against the budget,and to the General Assembly on an annual basis.

4. The expenses incurred in organising a meeting of the General Assembly and Annual Meeting shall in principle be

Michael Roche,Australian Stock Exchange, with Poul Erik Skaanning-Joergensen, Copenhagen Stock Exchange,both members of the Working Committee

borne by the host Member. The expenses so incurred maybe subsidised by the Federation in such manner as decidedby the Board of Directors, based on a proposed budget andto a maximum amount as set by the General Assembly1.The host Member may collect a fee from Annual Meetingparticipants in such manner as decided by the Board of Directors, based on a proposed budget by the hostingMember and to a maximum amount as set by the GeneralAssembly.

5. Meetings of the Working Committee, the Board of Direc-tors, and Subcommittees held in Paris shall be organisedby and at the expense of the Federation.

6. When the Working Committee is invited by a Member, theexpenses incurred in organising the meeting shall be borneby that Member.

7. The expenses of the Federation as set out in the annualbudget or as otherwise approved by the General Assembly,shall be financed as determined by the General Assembly.

ARTICLE 6AMENDMENTThese Internal Rules may be changed by the Board of Direc-tors. The changes become effective after distribution to theMembers.

I N T E R N A L R U L E S (C O N T I N U E D)

Bengt Rydén and Manuel Robleda – Past Presidents of the FIBVand of the Stockholm Exchange and the Bolsa Mexicana deValores at the end of the General Assembly

QUALIFYING CHARACTERISTICSFOR MEMBER

STOCK EXCHANGESSecurities markets wishing to apply for membership must :1. Be significant within its country of origin.

Significant means that, in addition to being importantbased on its size, a market should also be dedicated tosupporting, directly or indirectly, the development ofequity capital and be an important factor within thehome country's economy.

2. Be regulated by its own supervisory body, within astatutory framework.Apart from being regulated and supervised, marketsshould also have a specific responsibility to regulatethe markets and market participants.

3. Facilitate long-term capital raising.4. Pursue purposes that are in the public interest, includ-

ing :- be available to the public ;- have as a goal to be fair and orderly to protect all

public participants ;- provide a link between participants in the market

place.5. Subscribe to and comply with the World Federation of

Exchanges Market Principles.

1.Extract Minutes 1995 General Assembly FIBV financial contribution tohosts of General Assemblies Delegates discussed the proposal to contributefinancially to the organizational costs of FIBV General Assemblies andagreed on the principle to grant FIBV subvention of a maximum of US$150 000 annually, based on an application submitted to the ExecutiveCommittee.

It was decided to levy a participation fee for delegates of US$ 300 (US$500 for a delegate and her/his partner) with the exception of the Head ofDelegation and his/her accompanying person.

30


2 0 0 1 G E N E R A L A S S E M B LY

EVENTS

T he Madrid Stock Exchange hosted the 41st GeneralAssembly of the FIBV. The President of the Federation,

Mr. Antonio J. Zoido, who is also President of the MadridStock Exchange, welcomed the heads of the forty-two del-egations present.

The application for membership of the Budapest StockExchange was approved, bringing the total membership ofthe FIBV to 56.

The members of the Executive Committee whose terms wereending were unanimously re-elected. They are:• Mr. William J. Brodsky, Chairman and CEO of the Chicago

Board Options Exchange; • Mr. Jean-François Théodore, Chairman and CEO of Euronext; • Mr. Russell Loubser, CEO of JSE Securities Exchange, South

Africa; • Mr. Mohammed Azlan Hashim, Executive Chairman of Kuala

Lumpur Stock Exchange; • Mr. Alfred R. Berkeley III, President, of the NASD; • Mr. Eduardo Brenner, Deputy Chairman of the Sao Paulo

Stock Exchange; • Mr. Masaaki Tsuchida, President and CEO of the Tokyo Stock

Exchange.

The General Assembly renewed the auditor’s mandate for theperiod 2001-2006. The financial accounts for the year 2000were approved. The budget for the year 2002 was authorized.

The Secretary General spoke of working towards a higher pro-file and a modified positioning of the Federation itself. Thename FIBV has proven its effectiveness for members, but theuse of the French initials is sometimes unclear. Second, thereare more types of exchanges within the membership, notonly stock markets. Since its founding, and particularly inrecent years, the business areas have expanded. Another rea-son for changing the name is to allow for easier adaptationof the organization, if the Federation were to join forces infuture with IOMA/IOCA. The proposal before the Assemblyis therefore based on simplicity and inclusiveness.

In calling for a show of hands, the President first noted aclear majority for changing the Federation’s name, and thenan overwhelming vote in favor of "World Federation ofExchanges". Next, members agreed that :• member exchanges should simply become "Members"• affiliate securities markets should become "Affiliates"

• corresponding emerging markets should become "Correspondents"

• the executive committee should be renamed "Board ofDirectors"

• the name of the Working Committee remains useful andwill be kept

The President noted that these changes in name and spiritcould broaden access in future to different institutions work-ing in businesses directly related to exchanges themselves.

The President remarked that the Federation is now approach-ing the half-way point in its two-year trial affiliation withIOMA. Mr. Orgler, President of IOMA, took the floor to statethat going forward with this process was approved in a voteat the IOMA Annual Meeting in May. This collaboration isgoing in the right direction, and will be brought to a formalvote at the IOMA Annual Meeting in June 2002.

The Secretary General returned to the matter of timing. Forthe present General Assembly, the objective was to reviewthe idea, in order to give members a full year to reflect onthe impact of this proposed joining together on their orga-nization. It would be put to a vote at the October 2002 General Assembly of the World Federation of Exchanges

An ongoing tradition is to poll delegates on questions relatedto a variety of issues facing the exchange industry. The resultsof the "snap poll" are found below.

Ramon Adarraga of the Madrid Stock Exchange and Emine Basak of the London Stock Exchange


2 0 0 1 G E N E R A L A S S E M B L Y (C O N T I N U E D)

32

Compared to October 2000, an integrated, 24-hour market in equities today seems :?

closer to being realized 8 %further from being realized 39 %at the same point 53 %

Answer %

For 2002, is your exchange’s consolidated budget ??

bigger than for 2001 (+ 10 % or more) 32 %about the same 42 %smaller (- 10 % or less) 26 %

Answer %

In 2002, will more of your strategic work be onexternal development, internal efficiency manage-ment, or approximately an equal mix of the two ??

external 27 %internal 17 %an equal mix of the two 56 %

Answer %

Is your exchange involved in discussions about commercial development of any form with other exchanges ? Last year, 81 % of thosepolled were. Today ? ?

yes, in discussions 80 %no, not in discussions 20 %

Answer %

Are clearing, settlement and depository servicesconsidered part of your exchange’s value chain ? ?

yes 84 %no 16 %

Answer %

Business Trends

Market conditions in 2002 will :?speed up consolidation of exchange businesses 31 %slow down consolidation of exchange businesses 15 %simply present a different set of opportunities 54 %

Answer %

Is your exchange : ?a publicly listed company ? 32 %a private, for-profit company ? 38 %a cooperative, member-run firm,agency, or other legal form ? 30 %

Answer %

Has your exchange : ?extended trading hours and found this worthwhile ? 25 %extended trading hours and found results to be mixed ? 38 %decided not to extend hours ? 37 %

Answer %

EVENTS

Last year, most members expected a 24-hour market to bein place sometime after 2004. Yet 74 % of members said thatglobalisation in this industry was far from becoming a reality, suggesting that the period of time might be long.

One year ago the answer given was 18 % in favor of 24-hourtrading, 70 % of extended hours, and 12 % maintain thecurrent market time.

In October 2000, 45 % of members had demutualized, 16 %had approved plans to do so, and 39 % were planning towrite a proposal.


Will market conditions in 2002 lead to moreinvolvement by regulators in the markets, andmore regulation ? ?

yes 84 %no 16 %

Answer %

The exchange has a stake in one or more technology companies ? ?

yes 46 %no 54 %

Answer %

In the next 2 years, your exchange will putgreater emphasis on developing e-businessbeyond using the Internet as a means of communication : ?

yes 77 %no 23 %

Answer %

Last year, 75 % felt that systems capacity wasadequate. Today, do you still expect present ITcapacity to be adequate for the next two years ??

yes 71 %no 29 %

Answer %

The potential impact of STP on central counter-parties, clearing and settlement firms, anddepositories represents :?

an opportunity for exchangesto expand business 64 %a risk to revenue streams 19 %a change that will not have asignificant impact on the exchange 17 %

Answer %

Regulation in a For-Profit Environment Technology & Its Commercial Possibilities

Do you believe that Straight-Through Processing(STP) will :?

be common practice by 2004 33 %take longer to implement 59 %prove too costly to implement 8 %

Answer %

Last year, 62 % of exchanges expected to have some ownership ties to IT companies.

Do you think that market surveillance work is :?best performed and paid for by the exchange ? 39 %best shared with the regulatory authorities ? 54 %best left to the regulator to assume cost and responsibility ? 7 %

Answer %

Do you think that enforcement is :?best performed and paid for by the exchange ? 21 %best shared with the regulatory authorities ? 61 %best left to the regulator to assume cost and responsibility ? 18 %

Answer %

Do you consider that listing is :?best performed and paid for by the exchange ? 80 %best shared with the regulatory authorities ? 17 %best left to the regulator to assume cost and responsibility ? 3 %

Answer %

2 0 0 1 G E N E R A L A S S E M B L Y (C O N T I N U E D)

34

EVENTSTechnology & Its Commercial Possibilities (continued)

General :

Last year, 29 % of members were planning tochange trading systems. How many this year planto change the trading system in 2002-2003 ??

yes 27 %no 73 %

Answer %

Following the destruction of the World Trade Center, will you be altering back-up systems ??

yes 46 %no 54 %

Answer %

In 2002-2003, do you expect an increase of at least 10 % in the number of tradingfirms/members ??

yes 34 %no 66 %

Answer %

In 2002 (over 2001), do you expect an increaseof at least 10% in the number of new listings? ?

yes 40 %no 60 %

Answer %

In October 2000, the 2/3 majority of memberspolled said that trading activity by value was con-centrating more on the institutions. Today is this : ?

more true 77 %less true 23 %

Answer %

Your bourse : ?owns a controlling interest in a derivatives market 67 %plans to take a stake or developthis business internally 19 %has no plans for derivatives at the moment 14 %

Answer %

Concerning Exchange-Traded Funds (ETFs), the exchange :?

runs a dedicated section 44 %plans to start ETF facilities 38 %has no plans for ETFs at the moment 18 %

Answer %

Futures on individual stocks represent :?a threat to cash markets 16 %a means of creating greater liquidity on cash markets 84 %

Answer %

In its services to listed companies, yourexchange?

plans to become more active 84 %is sufficiently active 13 %judges this segment to be fully developed and expects competition 3 %

Answer %

Last year, half the members expressed the need to pay greaterattention to this client base.

In October 2000, the poll showed that 60 % believed thisinstrument would be a promise for cash markets, 11 % thoughtthey would a threat, and 29 % did not know.


General (continued)

The exchange owns the prices from the market it operates ? ?

yes 91 %no 9 %

Answer %

Corporate Governance :

Other Questions from Members ?

For those answering yes, please continue :

The country in which you operate has a code ofbest practices for corporate governance : ?

yes 76 %no 24 %

Answer %

Was your exchange involved in the developmentof this code ??

yes 85 %no 15 %

Answer %

Is the exchange involved in enforcement - forexample, in listing rules ? ?

yes 77 %no 23 %

Answer %

To promote the work of exchanges, internationalpolicy organizations (OECD, IFC, IMF, World Bank,BIS …) should concentrate on :?

business standards and principles 67 %risk management 14 %market structure 19 %

Answer %

What was the blueprint for your country’s code ??OECD/World Bank 24 %UK 31 %other 45 %

Answer %

Are there sanctions for companies which do notcomply? ?

serious penalties, including de-listing and payment of fines 28 %light penalties, such as public reprimands 41 %none 31 %

Answer %

Is there any systematic review of compliancewith this code ??

by the exchange ? 37 %by another body ? 41 %none 22 %

Answer %

Mr. Berkeley asked about member interest ingetting computer screens into the US market inorder to attract business in future. The Federa-tion is reflecting on getting involved in this work.?

those in favor 65 %those against 32 %undecided 3 %

Answer %

2 0 0 1 A N N U A L M E E T I N G

36

T he keynote address for the 41st

Annual Meeting of the World Federation of Exchanges, formerly FIBV– International Federation of StockExchanges, was given by Prof. LesterThurow, of the Massachusetts Insti-tute of Technology. Prof. Thurow laidout the economic context in whichthis year’s discussion of the exchangeindustry would take place.

Of primary interest is the revolutionary impact of informa-tion and computing technology on the world economy, andthe business and financial cycle which has passed from aperiod of exuberance to one of pessimism. Cataloging theimpact these forces have made on business, Prof. Thurowconcluded with analysis of the recovery scenarios around theworld. Based on the weakness in the European markets, andrecession in Japan and the United States, he could not pre-dict when the current concerns would give way; however, heprescribed that an aggressive fiscal program by the US government combined with a more reactive monetary policyby the European Central Bank was the best medicine.

Mr. Adair Turner, Vice Chairman ofMerrill Lynch Europe, agreed with thisshort term assessment, while notingthat the past decade was littered withfalse dawns of new eras. His analysisof the globalization trends focused onthose parts of the economy which hadremained local, and the extent to whichthey differed from those sectors under-going change from information andcomputing technologies.

In both addresses, the positive impact of globalization onthe economy as a whole was well documented. However, forcertain sectors, especially those managing information, thekey to survival was through consolidation. The exchangeindustry was one such sector, in his view.

Management challenges in a new Market Environment

Dr. Werner Seifert, Chief Executive of Deutsche Börse,articulated the reasons why he felt that consolidation of the

exchange industry as the sole course for the future was wrong.First, the exchange industry is not a sunset industry and hasstrong growth potential. Second, the ownership structurenecessary to efficiently run an exchange is addressed throughdemutualization and listing of the exchange operator. And,finally, the securities process chain may be adapted to a muchbroader use.

Mr. David Wright, Director of Financial Markets, EuropeanCommission, highlighted the steps being taken in Europeto strengthen the capital markets. Underpinning this workis a liberal philosophy with emphasis on the harmonizationof rules and investor protection. The intended result is thecreation of a level playing field through a single Europeanmarket, though the Commission has not spoken out in favorof one solution over another.

In the United States, the SEC, repre-sented by Ms. Elizabeth King, Asso-ciate Director of Market Regulation,is pursuing two goals in the context ofmultiple competing markets. These arethe promotion of competition amongexchanges and the desire to reducefragmentation in the markets due tothe harmful effects this may cause toorder execution. With the arrival of thenew Chairman, various options are

being reviewed, including at one end of the spectrum a hands-off approach in encouraging competition among market cen-ters, and at the other end, the implementation of a nationalprice time priority system.

Mr. Georges Ugeux, Group ExecutiveVice President of the New York StockExchange, revealed his exchange’svision for coping with globalizationand its impact on the exchange indus-try. NYSE already has the largest trading in non-domestic companies ofany bourse, and may be considered bysome measures as the largest Europeanmarket as well as the largest Americanmarket. For the creation of a moreinterconnected global market, local exchanges will continueto perform key roles. Harmonization around common stan-dards in areas such as settlement cycles will be essential.

EVENTS

Elizabeth King of theUnited States SEC

Adair Turner,Merrill Lynch Europe

Georges Ugeux,New York

Stock Exchange

Lester Thurow,Massachusetts Institute

of Technology


Work with Regulators : OTC Instru-ments and their Impact on Cash andDerivatives Exchange

The Secretary General, Mr. Thomas Krantz, introduced thesecond theme of the Annual Meeting, working with regulatorson OTC instruments derived from exchange prices and prod-ucts. Mr. David Brown, Chairman of the IOSCO Technical Com-mittee, noted that the size of OTC products ($95 trillion) andthe growth rate of equity-based derivative OTC products (around25% last year) made this a sensitive issue. However, pressurefor regulators to intervene is diminished by the fact that themarket has few retail investors, and that the participating insti-tutions are regulated in other areas as to their solvency.

Mr. Paul Wright, Head of Department, Complex GroupsDivision at the FSA in London, considered the difficultiesin mandating disclosure. These products are by nature inter-national, which implies that any obligatory disclosure shouldbe made on a cross-border basis while at the same time cen-tralizing information in a manner quick enough to make theinformation obtained useful. However, all the variations ofdisclosure come with considerable drawbacks.

Mr. Robert Aber, Senior Vice Presi-dent of NASD, agreed with the panelists that the proper time to con-sider increased surveillance of the OTCproducts would be if the nature of theinstruments changed or the exposureof the general public increased. Goingforward, Mr. Aber considered that,should these changes take place,exchanges would become the logicalplace for these instruments to trade,at which time greater transparency would be required. In themeantime, one of the advantages of the OTC product was itsability to adapt to new conditions and client needs.

Emergency Procedures : a Discussionof the Lessons from the World TradeCenter Attack

The next issue before the Annual Meeting concerned con-tingency planning. Mr. Aber shared some of the lessons thatthe US markets had learned in the midst the 11 September

emergency. The key factor was communication and main-taining contact with other markets, with government, withemployees and with member firms.

Mr. Alfred Berkeley, President of NASD, added that the mar-ket regulators had played a key role in the reopening of themarket. The cooperation between business and government,market operator and market regulator, had greatly aided thesmoothest possible renewal of normal business activity.

Mr. Jean-François Théodore, Chairman and Chief Execu-tive Officer of Euronext, related the decision of his exchangeand the other European exchanges to continue trading in themidst of the crisis. One of the factors that led to this deci-sion was an agreement which had taken place just before theGulf War by the members of the Executive Committee of FIBV.In anticipating the possibility of market turbulence, they hadagreed that keeping the market open, if technically possi-ble, would be the correct solution.

Mohammed Azlan Hashim, Chair-man of the Kuala Lumpur Stockexchange, described the sequence ofevents that took place in Asia, wherenews of the attacks in the US wasreceived during the evening, aftertrading hours. Faced with the impos-sible task of contacting and instruct-ing all market participants in the inter-vening hours before the next opening,the only option was to close the mar-kets. In light of experiences thatoccurred in the first markets to open in Asia following thenews, this decision was seen in retrospect to be the most pru-dent course to take.

Mr. Brown commended the exchanges for their work duringthe crisis and stated that it was surprising how well the mar-kets functioned. Close cooperation between exchanges andregulators was set to continue as issues such as internationalfinancial market abuse and contingency planning were nowpriorities.

Mr. Wright commented on the measures that regulators werewilling to take to ensure market stability, and on the impor-tance of communication between the international centersto ensure that these changes were well understood.

Robert Aber, NASD

Mohammed Azlan Hashim,Kuala Lumpur

Stock Exchange

38

Where Derivatives and Cash MarketsMeet : Equities and Futures on Equities

Futures on equities are products bringing together the derivative and cash markets. The panel was chaired by Dr. Yair Orgler, Chairman of the Tel Aviv Stock Exchangeand the President of International Options Market Asso-ciation. The Tel Aviv Stock Exchange operates both cash andderivative markets and enjoys the highest ratio of derivativeto cash trading in the world. The panelists in the discussionrepresented markets that had either launched single stockfutures or were well advanced in their plans to do so.

Mr. Nicholas Weinreb, Deputy Market Secretary from LIFFE,described the "Universal" Stock Futures which trade in Lon-don. These are based on a geographically wide range of stocks,and cash delivered for simpler settlement. As these productshave been recently introduced, these are still early days andthe roll out of new issues is continuing. The market gener-ally met with pre-launch expectations. Building on this suc-cess, a significant development will be the opening of thejoint Nasdaq/LIFFE market in the coming months.

Mr. Ignacio Solloa, Director of Mar-keting at MEFF, listed the keys to thesuccess which his exchange has expe-rienced with Single Stock Futures. TheMEFF has the best liquidity so far ina range of issues with domesticallylisted underlying securities. This success may be attributed in part tointegrating the Single Stock Futuresinto the existing market standards for trading, delivery and for taxationpurposes.

Mr. Thomas Kloet, President, Sin-gapore Exchange, explained theobjectives which his market has setin deciding to launch Single StockFutures later this year. The productmakes great sense for an exchangewhich is active in both the cash andderivative markets, for it allows the exchange to build on those synergies.

Central Counterparty Developments

Mr. Ruben Lee, of the ISMA Centre, the Business Schoolat the University of Reading, presented a work in progresson the question of central counterparties. His study con-cerned three areas : the link between the exchange and theCCP as regards ownership, and how this may affect the pub-lic interest. The second point is the modification in risksassociated with a central counterparty. And the third issueis the multi-faceted services that may be offered, includingtrade registration, novation, performance guarantees, etc.

Among the areas highlighted in the study was the difficul-ties to effectively link cross border CCP services. This is duein part to differences in the markets and the regulation ofthe different countries. The question of legal certainty, espe-cially when counterparty risk is being offset, is an exampleof the hard problems involved.

It was noted that it is nearly impossible to quantify the savings that may be realized by implementing a CCP, or bychanging its ownership structure. The author noted that inthe overall cost of cross-border trading, it is necessary toinclude the cost of custodian services. These services con-stitute a large part of cross-border expense, and it is equallynoteworthy that the drivers of a clearinghouse-as-public-utility approach are sometimes the same players who offerthose services.

Mr. Martin Wheatley, Deputy Chief Executive Officer ofthe London Stock Exchange, prefaced his remarks by stating that the LSE does not own a CCP, and that its Chair-man has on occasion voiced reservations with regard toexchange ownership of after-trade services.

The London market did not have a CCP until recently. Theneed for a CCP increased with the shift from the market-making trading to a greater use of the electronic order book.

The next step for the domestic CCP will occur when nettingis introduced. This is expected to greatly reduce settlementcosts. These developments have been implemented for thedomestic markets; they have not been implemented at aninternational level, where there is a strong need for compe-tition while at the same recognizing the economies of a cen-tralized solution.

2 0 0 1 A N N U A L M E E T I N G (CONTINUED)

EVENTS

Thomas Kloet,Singapore Exchange

Ignacio Solloa,MEFF


Mr. K. C. Kwong, Chief Executive Officer, Hong Kong Exchanges andClearing, contrasted his exchange’soperation of all facets of the market,including the CCP, to the Londonmodel. In his opinion the preoccupa-tion of the question of abuse of a dom-inant status is misplaced. While someexchanges have earned a dominantposition as a liquidity concentrator,there clearly is widespread investmentchoice provided by numerous sources -

competition from other international exchanges, from othernon-exchange products, such as performance guarantees thatmembers provide their clients, from alternative trading sys-tems, from in-house matching of orders, from synthetic OTCequity vehicles. In short, a range of various sources assuresthat competition to provide reasonably priced services toinvestors is maintained at all times.

Experience has shown that the recent development ofexchanges often passes through a demutualization process,and then having a new ownership structure. From there, theexchange that lists its shares places upon itself the pressures of market discipline. In protecting the image and

quality of the market, the exchange must ensure that it continues to protect the public interest. This motivation forthe exchange is supported as well by the commercial interestwhich demands that the exchange grow it business and itsmarkets.

Bernie Till, Vice President, DTCC London, found much toagree with in the report. The DTCC fits a model of horizontalintegrated services, as 45 exchanges feed in transactions.

Should exchanges own the CCP? There is no clear reasons whythey should not. Clearly many exchanges do run a CCP or wouldlike to, so the question is whether they are able to handle riskmanagement. The revenues are easy to see. It is harder toquantify the cost savings and other benefits. For example,savings from reduced risk varies according to the actors.

The costs that are sometimes cited in comparison betweenafter-trade services in the US and Europe are probably hardto justify. In some cases, this is comparing domestic serviceswith international services. Nevertheless, the regulators’ moti-vation to intervene is real and understandable. Caution shouldbe exercised in trying to implement a solution around a sin-gle process and standard for cross-border transactions. Thoseborders will be there for some time to come.

K. C. Kwong, HongKong Exchanges andClearing

Martin Wheatley, London Stock Exchange; Ruben Lee of the Business School at the University of Reading;and Bernie Till, DTCC London during the Annual Meeting

D E R I V A T I V E S W O R K S H O P

40

A s part of developing links with the IOMA / IOCA group,the Federation was invited to participate at the 2001

IOMA Annual Meeting. The industry topics addressed at themeeting concerned payment for order flow, linkage betweenmarkets, demutualization, and a roundtable discussion onclearing houses. For information on the following reports,please contact the World Federation of Exchanges Secretariat:

• "ASX Impact of Listing", Richard Humphry, ManagingDirector & CEO, Australian Stock Exchange

• "Demutualizaton 2.0 Listing the Exchange", PhupinderGill, Managing Director & President, Chicago MercantileExchange Clearing House

• "Linkage of Derivative Markets", Peter Hiom, General Man-ager, Strategy & Business Development, Sydney FuturesExchange

• "Linkage of Derivatives Markets", Ignacio Solloa, Directorof Markets, MEFF

• "Industry Trends", Richard DuFour, Executive Vice-Presi-dent, Chicago Board Options Exchange

The participation of the Federation included:

• The FIBV Cost & Revenue Survey, presented as a sample ofhow the Secretariat builds industry information

• FIBV Derivatives Workshop on Universal (or Single) StockFutures, a subject which joins both organizations. An FIBV-style snap poll was also conducted.

• A presentation made on FIBV, and why joining forces withIOMA is of interest

• The IOMA Annual Statistics Report, prepared in part byFIBV

FIBV Derivative Workshop

The panel represented a wide range of experience both inregard to its geographic spread and by members’ differentstages of development on single stock futures. The panel wascomposed of :

• William Brodsky, Chairman & CEO, Chicago Board OptionsExchange

• John Duggan, Senior Vice-President, Division Head, Deriv-atives Clearing, Singapore Exchange

• Roy Leighton, Chairman, The Futures and Options Asso-ciation

• Ignacio Solloa, Director of Markets, MEFF• Nicholas Weinreb, Director, Market Secretariat, LIFFE

Presentations by the panelists are available from the Secre-tariat.

EVENTS

Antonio Zoido, President of the WorldFederation of Exchanges and theMadrid Stock Exchange;AlfredRizkallah, Bovespa


D A T A M A N A G E M E N T & V E N D I N G W O R K S H O P

EVENTS

M r. Chingpo Chiu, Senior Executive Vice President ofthe host Taiwan Stock Exchange Corporation, wel-

comed delegates and noted that the spirit of the workshopwas to share innovative and successful practices in the fieldof data management and vending. Delegates came from bothexchanges and non-exchange institutions, among which wereinformation vendors and intermediaries.

Mr. Thomas Krantz, Secretary General of the FIBV, addedthat total data management and sales revenue neared USD800 million for the 55 member exchanges in 2000. Thoughgrowing in absolute terms, these revenues represent a sta-ble average of 9% of total revenues for the members. Thepresentation gave further detail of how this share variesaccording to the legal status of the exchanges. With 8 outof 55 member exchanges now listed, the legal segmentationwill become increasingly relevant in the future when mea-suring the impact of information management strategies toincrease revenue.

Recent Initiatives by Exchanges:• Georg Gross, Head of Marketing and Sales, Information

Products, Deutsche Börse AG• Chuck Lu, Manager of Market Information, Taiwan Stock

Exchange Corporation• Eduardo Trigueros Gaisman, Issuers and Information

Director, Mexican Stock Exchange

A review of initiatives by exchanges. The panel explored arange of data products and strategies used by exchanges.How does the commercialization of data fit into the exchange’soverall commercial strategy? The specific challenges arisingin the cross-border environment or in alliances. The processand results at exchanges creating subsidiaries to developvalue-added services

Tomorrow’s Data Environment:• Alan Ku, Director, Reuters Consulting• Michael Atkin, Vice President, Financial Information

Services Division - SIIA

The panel examined the impact of changing technology ontraditional data sales. The issues included the impact thatInternet may have on the value of real time feeds, the chal-lenges of integrating XML or MDDL. What current trends inthe vendor/ re-vendor relationship are changing, and whichwill remain constant ? The panel also looked at the costsinvolved in upgrading technology and communications inresponse to new demands for information.

New Strategies for Revenue: • Kwok Keung Lee, Senior Vice President of E-Business &

Information Services, Hong Kong Exchanges & Clearing• Peter Belling, Senior Vice President, Copenhagen Stock

Exchange

Continuing in the vein of the discussion on exchange initia-tives, this panel examined a wider horizon for managing newkinds of data in new media. The discussion touched on newbusiness models used by exchanges. Of special interest wascontent on Internet, and building an Internet strategy com-plementary to traditional data sales.

Indices, Copyright, Brand Protection:• Daan Bos, Executive Director Information Services,

Member Executive Committee, Euronext Amsterdam• Michael Lim, Managing Director, FTSE Asia Pacific

Control of data is essential for exchanges to provide fair mar-kets. As technology for aggregating information has improved,what exchanges own, in terms of prices and other informa-tion generated on the markets they operate, and how longthey own it might be open to interpretation.

With the growth of index-based derivatives and new prod-ucts, such as Exchange Traded Funds, more than everexchanges are looking beyond their own market to createproducts. The notion of a listed company belonging to anexchange may be disappearing. What new revenue sourcescan exchanges develop with index developers, and what chal-lenges are the index makers facing?

Transparency, Disclosure and Exchange Obligations:And Tomorrow’s Standards Today • Thomas Krantz, Secretary General, FIBV• Michael Atkin, Vice President, Financial Information

Services Division - SIIA• Herbie Skeete, Director, Equities, Commodities & Energy

Content, Reuters

The securities industry is on the verge of automating theprocesses of business on a far greater scale, and at a muchfaster pace. Handling vast amounts of data at these speedswill be a challenge. The technology exists, but standards arenecessary to achieve an optimised result from the process.This session will look at some of the many issues to be definedfor the new world of data.

The Federation continued to work closely with the Mass-achusetts Institute of Technology (MIT) in developing

programs for the IT directors at exchanges. The first on-campus workshop was held in May 2000 and concentratedon research. For the workshop held in November 2001, thefocus was on applied technologies which may impact thetechnology of exchanges, or the IT departments at exchanges,within the next three to five years. In developing this pro-gram, the Federation made efforts to include technology com-panies and financial institutions, in order to have their input.The workshop included tours of the Artificial Intelligencefacilities on the MIT campus, and a tour of the Fidelity Cen-ter for Applied Technology in Boston.

Exchanges: Their Future as Technology EnginesDr. Charles Tresser, Head of IBM’s Financial ServicesResearch Center, noted that if one asks what technologywill come into use in the next two to five years, the answerswill be found among the pilot projects which are alreadyworking in the labs. IBM has a particular interest in the waythat STP and 24/7 markets will affect the technology thatexchanges need to operate.

Personal RoutersSharon Gillett, Executive Director, MIT Internet & Tele-coms Convergence Consortium, introduced the work of thisgroup, which looks at applications and end-user devices. Forexample, they analyze broadband access and the problemsfor broadband solutions in the home.

Artificial IntelligenceHerbie Skeete, Director, Equities, Commodities and EnergyContent, described the project that Reuters developed forcleaning exchange data. This systems was designed to mon-itor the real-time data feeds into Reuters. Traffic may be ashigh as 10,000 updates per second.

Network Security (MIT)Jeffrey Schiller, Security Area Director for the InternetEngineering Task Force, cautioned against thinking that theInternet can be secure. It was not designed for that; it wasdesigned to communicate and to work through impediments.The first reaction when faced with a breach in security is toadd security. More importantly, the reaction should be totrace who is attacking and how they are doing so.

Technical Issues for the Users of MarketsTed Charrette, Vice President, Fidelity Center for AppliedTechnology, described how technology is used for tradingand investment fund services at Fidelity, and how the lab

looks to use technology as a value-added element for attract-ing and servicing retail clients and developing long term rela-tions with institution clients.

Center of Information Systems Research (MIT)Jeanne Ross, Principal Research Scientist at the Centerfor Information Systems Research (CISR) explained thatwhen considering the question of IT architecture as an agentof change, it is possible to think of the analogy with an air-port. The airport includes both shared and distinctive ser-vices. Yet once the architecture is built, it restricts what itcan do in the future. Companies face similar problems inextending the core of their business to profit from new oppor-tunities.

Technological Vision for the Financial Services IndustryAnne Ambrose from Compaq Computer’s Global FinanceSolutions, addressed some of the hot topics that were dri-ving change in the exchange industry. Business continuityhad become the major concern of the day for obvious rea-sons, but before that interest had centered on the next gen-eration of exchanges. This model foresaw clearing and set-tlement integrated with STP into international, electronic,floorless markets that offered uninterrupted access. There ispressure on the IT departments to provide a “silver bullet,”or total solution for this question.

Aggregation of InformationStuart Madnick, Professor of Information Technology pre-sented the work of the Context Interchange Systems Lab-oratory (CISL) at the MIT Sloan School of Management.The central question in the presentation dealt with infor-mation integration. The aggregator is an actor who gathersand combines information (data) with or without the agree-ment of the author. Such actors add value to the informa-tion either by providing analysis, or in the way the informa-tion is presented to the user, the format itself.

Future Directions of the Artificial Intelligence LaboratoryRodney Brooks is the Director of the Artificial Intelligence(AI) Laboratory at MIT. Like computers, artificial intelli-gence is now embedded in many products. It is difficult todefine what the term AI means. It is probably most oftenused to describe things that we do not know how to do yet.That is because once AI is manufactured into a product orapplication, it no longer seems like AI. Thus applications thatwere definitely thought of as AI 10 years ago, and which arefound in web browsers for example, are now thought to becommonplace.

APPL IED TECHNOLOGY FOR EXCHANGES WORKSHOP

42

EVENTS


C O S T A N D R E V E N U E S U R V E Y 2000

REPORTSIntroduction

In 1991, when the Federation published its first annual Costand Income Survey, the large majority of its members (almost90%) were registered under the status of legal companies orwere association/cooperative arrangements. Exchange own-ership was restricted to members of the exchange, or wasmainly in their hands. Not much attention was paid to thisquestion in those days, and the information in the surveywas not organized around this issue.

At that time, bourses were largely viewed as being run as"private clubs" where the transfer of seats used to take placeamong the same category of owners, most of the time themarket intermediaries. In these exchanges, ownership andintermediation activities were strongly linked. The remain-ing Federation bourses were public or semi-public institu-tions owned by the state through the ministry of finance orthe treasury, or were registered under specific laws in theircountry.

This backdrop began to change in 1993 when the StockholmStock Exchange was the first bourse in the world to priva-tize, leading the future group of privatized exchanges thatwas to come. In the late 1990s, the generalization of thedemutualization process among an increasing number ofexchanges significantly changed the old picture, and gavethe way to a dramatic transformation of the global securi-ties market landscape.

This process has now resulted in a quite different legal set-up of securities exchanges. At year-end 2000, the number ofexchanges with ownership restricted to their members droppedby half to represent around 46% of the Federation’s totalmembers, while the number of privatized and listed exchangesgrew to represent almost 40% of the Federation’s bourses.The other exchanges were registered under various local laws,or were still state institutions. But the October 2001 Gen-eral Assembly poll results indicated that more demutualiza-tions will be coming.

The annual cost and income surveys conducted by the Fed-eration have taken place in this changing framework, andhave tried to depict year after year the evolution of theexchange industry.

In order to understand the effects of this changing legalstructure on its exchange members, the Federation’s surveyhas this year modified the breakdown established in 1999.The increasing number of exchanges which list on their ownmarket, the necessity to regroup into one category theexchanges with ownership mainly in the hands of their ownmembers, and the need for analytical purposes to differen-tiate between inside and outside ownership have led the Fed-eration to establish a new breakdown :

1.the first category is composed of exchanges registered asprivate, limited companies with ownership restricted totheir members, also including associations or cooperatives ;

2.the second category includes exchanges registered as pri-vate, limited companies which have "privatized" or "demu-tualized", but which are not listed ;

3.the third category regroups the publicly listed exchanges ;and

4.the fourth category gathers exchanges with another legalstatus, including, for example, those exchanges which havestill a public or semi-public structure and belong to thestate.

There are hundreds of years of legacy questions weighingupon the securities industry, and affecting discussions aboutspecific distinctions in each jurisdiction. But the Federationbelieves that these 4 categories are about as clear as can bemade, and reflects as closely as possible the present realityin this industry.

The objective of the Cost and Revenue Survey is to identifythe main sources of expenses and income of World Federa-tion of Exchanges’ members, analyze their different financialaspects, legal and ownership structures, accounting prac-tices, and staff numbers, allowing for a more detailed analy-sis and planning of their businesses.

The section concerning the variety of markets run by eachexchange has been expanded as these past years have seenthe emergence of such new financial instruments as ExchangeTraded Funds (ETFs), the development of warrant markets,etc.

Finally, two new aspects refer more to the financial andaccounting policies of exchanges. The survey examines the

C O S T A N D R E V E N U E S U R V E Y 2000 (C O N T I N U E D)

44

ratio between fixed costs and revenues, and determines whatis the proportion of exchanges using the International Account-ing Standards (IAS) for their own financial statements.

This survey tries to determine the effects of the change inlegal structure on bourses activities, and attempts to givereaders a better understanding about how bourses respond tothe increasing business challenges facing the securities indus-try by introducing new legal, accounting, and financial mea-

sures. Examples of these responses include the diversificationof their ownership and the development of other sources ofincome, such as services.

This survey is based on the responses of 48 Federation exchangemembers out of a total of 55 at that time.

In the broadest sense, the Federation’s member exchangesfinancial picture can be represented in the following table.

REPORTS

1995 1996 1997 1998 1999 2000 % change00/99

Total Revenues 3,830 4,380 4,837 5,121 6,464 6,751 4.4%of whichListing revenues 671 797 797 902 1,020 1,036 1.6%Trading revenues 1,268 1,597 1,958 2,002 2,726 2,931 7,7%Services revenues 1,376 1,342 1,400 1,498 1,781 2,089 17.3%Other revenues 458 587 593 725 944 735 -22%

Costs 3,237 3,172 3,350 3,780 4,439 4,854 9.3%Net Assets 4,440 5,238 5,360 5,948 7,169 7,273 1.5%

Source : World Federation of Exchanges members

(In USD m)

1. Privatized and listed exchanges represented a signifi-cant part of the Federation’s members in 2000, withthe number of listed exchanges jumping from 2exchanges in 1999 to 8 in 2000 ;

2. The variety of financial products offered by exchangeswas wider than ever in 2000. Warrants were the thirdmost important product to list and trade on Federationexchanges, while the listing of ETFs became a majornew product across many members ;

3. Exchanges with inside ownership had a significantlyhigher number of member/intermediaries compared tobourses with outside ownership ;

4. A large majority of Federation exchanges (62.5%) werefor-profit entities in 2000 ;

5. Revenues generated by listed and privatized exchangesgrew at a more rapid pace than revenues of the otherlegal categories of exchanges ;

6. Dissemination of market data and information provideda large part of the service revenues in all legal groups ;

7. Clearing, settlement, and depository activities wereimportant sources of service income for listedexchanges ;

8. Systems costs grew at a faster pace than staff salariesduring the period 1995-2000.

Main findings of the study


1. Specificities of the Federation’smembers

1.1 Legal Structure of Federation Exchanges

Privatized and listed exchanges represent a significant partof the Federation’s members

As expected, the most significant fact revealed by the newsplit adopted this year is the emergence of the groups com-posed by the privatized and listed exchanges, which rep-resented at the end of 2000 25% and 13%, respectively, ofthe Federation’s total members. From this finer definition,much better information can be derived.

Exchanges included in these two groups were previouslygrouped in the wider and more vague category of legal com-panies. In fact, they have just been broken-out more clearly.

By private, limited company the Federation is using the broadjuridical term to encompass companies registered as limitedcorporations (Inc, Ltd, Plc, etc…), with a paid-up capitalbase. The only difference between the legal companies groupon the one hand, and the block composed of the privatizedand listed exchanges on the second hand stems from the factthat the first group still has inside ownership, and that thesecond block has opted for a more open outside ownership.This distinction in governance and corporate objectives isfundamental, and as expected, leads to very different profitand loss statement structures. It was essential to reorientthe Federation’s cost and revenue survey around this point.

With this in mind, the very large majority (83%) of the Federation’s exchanges were private, limited companies atthe end of 2000. This wider category is composed of :

• the legal company exchanges with inside ownership, rep-resenting 46% of the Federation total members ; and

• the exchanges with outside ownership, represented by theprivatized and the listed exchanges groups accounting for25% and 13%, respectively.

Finally, the last group classified under the denomination "other"legal structures represented 17% at the end of 2000. The term"other" legal structures can cover different realities, such asexchanges which are owned by the state or have a semi-public status, as Istanbul and Tehran do. This form of legal

structure has considerably decreased over the past years withthe privatization process. This type of exchange was mainlyfound in Europe, where the weight of the public sector in theeconomy was important for decades. The other exchanges registered under this hybrid category embrace various formsof legal organizations, and were found under a range of locallaws. This group included exchanges as different as BuenosAires, Johannesburg, South Korea, Thailand, or Tokyo.

1991-2000 : the emergence of a new type of exchange

Comparing the legal structure of the Federation’s exchangemembers at the beginning of the 1990s and in 2000 con-firms the dramatic change operated in the regulated exchangesindustry during this period. Its impact has been felt in termsof exchange culture, and openness of most bourses to com-mercial company behavior. The transformation of the exchangetraditional approach in favor of more commercial attitudes wasalso perceptible in exchanges retaining a mutual structure, asthey found that they must and could compete commerciallywith other exchanges or trading systems.

In 1991, the large majority of the Federation’s members,including the legal companies and the group of associa-tion/cooperative exchanges, were in the hands of their ownmember brokerages, representing a combined share of 90%of the Federation’s total exchanges. In 2000, the percentageof exchanges with inside membership dropped drastically to46%, while the groups of privatized and listed companiesemerged to account 38% of the Federation’s total exchangesat year-end 2000, as shown by the graph below.

Some of the exchanges registered under an association orcooperative status in the 1991 pie chart were, in 2000, clas-sified in the legal companies group because they maintaininside ownership. Other bourses demutualized and formedeither the group of privatized or listed exchanges. Finally, afew of the association/cooperative exchanges group classi-fied themselves into the "other" legal structure grouping, asthey were neither a legal company nor a privatized exchange.

The emergence during this decade of new challenges repre-sented by the emergence of proprietary and alternative trading systems, ECNs, the development of on-line tradingthrough the Internet, etc… have forced most exchanges toreact. Privatization has been one of the responses, thoughby no means the only one.


46

REPORTS

Other

Association/Coop

Listed Exchanges

Legal Companies

Privatized Exchanges

LEGAL STATUS OF FIBV EXCHANGE MEMBERS

(2000)

(1991)

25.0%

12.5%

16.7%

72.90%

45.8%

18.0%

10.0%

Three main reasons given for exchanges to demutualize arethe need for fresh capital, for diversification in the share-holder base, and for splitting the owner function from theuser function. These external pressures have forced tradi-tional bourses to adapt their legal structure, and so to demon-strate clearly their know-how as market operators. Their suc-cess in responding to these new threats and opportunities,and to grow profitably, depends in large part on the supportof a diversified shareholder base, a faster decision-makingprocess, and a greater ability to raise new capital.

At the end of 2000, 18 exchanges privatized or listed ontheir own market

At the end of 2000, the number of exchanges which privatizedor listed on their own market increased sharply compared to1999, as the combined number of privatized and listed boursesreached a total of 18 against 11 the previous year.

Demutualized bourses are entities whose capital is dividedinto shares directly owned by different groups of share-holders. Once the demutualization has taken place, the privatized exchange authorities can take the decision to listthe exchange’s shares, or maintain the shares in the handsof defined groups of shareholders. In the first case, the sharesof those exchanges are listed on the exchange’s own market,signaling that they can be traded among anonymous share-holders.

In the second case, the exchange authorities can also decidefor strategic reasons not to list the exchange’s shares, leav-ing the share ownership restricted to defined and well knowngroups of holders. This solution may also prevent the exchangefrom hostile takeovers, or in some manner being botheredby undesirable shareholders.

Increase in the number of listed exchanges

Within the trend towards demutualized exchanges, the mostremarkable fact was the growth of exchanges which have cho-sen to list their shares on their own market. In 1999, onlytwo exchanges had so far their shares listed : Stockholm viaits parent company OM, and Australia. At the end of 2000,this group was composed of 6 exchanges.

These exchanges were : Athens, Australia, Hong Kong, Singapore, Stockholm, and Santiago.

Other

Listed Exchanges

Legal Companies


MARKET CAPITALIZATION OF FIBV MEMBERSACCORDING TO LEGAL STATUS

(end-2000 figures)

59.5%

20.8%

8.0%

11.7%


Several other exchanges are considering the idea or haveplans to demutualize in the coming months and years, includ-ing the NASD, the New York Stock Exchange, and also somelarge options and futures markets as the Chicago Board ofTrade (CBOT), and other commodities derivatives exchangesin the world. In 2001, Euronext, Deutsche Börse, and theLondon Stock Exchange did go on to list.

Relative size of each legal structure group in the Federa-tion’s total market capitalization

Exchanges with a legal company status covered around 60% ofthe total Federation membership market capitalization in 2000,while privatized and listed exchanges represented 21% and 8%respectively. The notable weight of the legal company group islargely due to the singular influence of one of the legal com-pany exchanges (the New York Stock Exchange), which alonerepresented 37% of the total Federation market capitalization.

It is worthwhile mentioning that the weight of listed exchangesin the total market capitalization was still modest at 8% at the end of 2000, and did not match the weight that theseexchanges represented in the Federation’s membership (13%)responding to this survey. Likewise, it is quite interesting tonote that privatized exchanges, which accounted for 25% inthe Federation’s membership, covered an almost similar shareof the total market capitalization (21%).

Finally, the group of "other" legal status bourses represented12% of the total Federation market capitalization, while theirweight in the membership was at 17%.

1.2 Ownership Structure of World Federa-tion of Exchanges’ members

Exchanges’ members still the largest owners of boursesdespite demutualization

At the overall Federation level, and on an average basisweighted by the number of members in each category, mem-ber firms were still the largest group of owners of exchanges,as they could be found in 89% of them.

It is not surprising to find member owners in all (100%) of thelegal company exchanges, as one of the main characteristic of this group is inside ownership. In this group, "other"

owners could be found in 13% of exchanges, but in the overall members represented a quasi unique owner group.

Perhaps more surprisingly, members/intermediaries were present in the ownership of 92% of the privatized exchanges,and in the ownership of 100% of the listed bourses cate-gories. This means that members/intermediaries have kepta strategic share in exchanges equity capital, and have con-tinued to play a key role in their governance, even after thedemutualization took place. Thus, the privatization/demu-tualization processes have not led to an important reductionof the members/intermediaries share ownership.

Privatized, and especially listed exchanges, have the mostdiversified share ownership structure

After the privatization/demutualization processes, the priva-tized and listed exchanges naturally had a more diversifiedshare ownership structure than before, even if their ownershipstructure was still dominated by members/intermediaries. After privatization, new categories of owners appeared bothin the privatized and listed exchange categories, such as pri-vate shareholders, listed companies, and institutions (a cat-egory which includes banks, insurance companies, etc…).Private shareholders were logically present only in the listedexchanges group, where they could be found in 33% ofexchanges. The listed exchanges group was of course the onewith the most diversified ownership structure.

Other shareholders in privatized and listed bourses, which werefound in a quite high number of exchanges, included the boursemanagers and employees. When these exchanges privatized, orlisted, part of their equity capital was reserved for managers andthe personnel, as often happens when a company privatizes.Listed companies and financial institutions were, after theexchange’s members, the largest groups of owners in the pri-vatized and listed exchange groups, respectively. Listed com-panies were present in 60% of the privatized exchanges group,while financial institutions could be found in 50% of the listedexchanges group.

In all exchanges registered under "other" legal structures,members/market intermediaries were present in the owner-ship in 75% of cases, while other shareholder categories werefound in 38% of them. This last category of owners includesthe state or some government institutions, as exchanges having a public or semi-public status can be found in this group.


48

REPORTS1.3 Variety of Markets

Equities and bonds still the most common products

During the past few years, a range of new products werelaunched by various exchanges such as Exchange Traded Funds(ETFs), while some older financial instruments like warrants orinvestment funds enjoyed renewed favor from investors, becom-ing more important to the exchanges’ business and revenues.

At the overall Federation level, and on an average basis weightedby the number of members in each category, almost allexchanges (98%) ran an equity market in 2000, the same figure as in 1999, the sole exception being the Chicago BoardOptions Exchange (CBOE).

Some 83% also ran a debt market. Equities and bonds werethe most widespread securities listed and traded on the Fed-eration’s exchange member markets, and of course this is thedefining activity.

Warrants were third most common product to be listed andtraded on Federation exchanges

Coming before options and futures, warrants were the thirdmost common financial instrument listed and traded on theFederation’s exchange markets. This product was present in71% of bourses at the end of 2000, compared to 54% foroptions and 56% for futures.

The number of derivatives markets among the Federation’smembers, after having grown during the 1990s, remainedstable in 2000. In previous years, the number of derivativesmarkets increased as a consequence of concentrations ormergers between underlying cash markets and derivativesmarkets under one roof, as happened on several exchangesin Europe (Amsterdam, Helsinki, Paris, Stockholm, etc…)and in Asia (Hong Kong, Singapore, …).

After derivatives, the fifth most frequently listed and tradedinstrument among the Federation’s members was investmentfunds. This type of instrument is one of the most widely usedinvestment vehicules by private investors, big institutionalinvestment firms, and pension funds, as they allow for split-ting up investment risks among a wide range of underlyingassets. It is expected that in coming years, investment fundswill gain a significant share in pension funds’ portfolios. Retire-

LegalCompanies

PrivatizedExchanges

ListedExchanges

WFEAverage

Other0

20

40

60

80

100

OWNERS OF EXCHANGESACCORDING TO LEGAL STATUS

% (in 2000)

MembersInstitutions

Listed Co.ShareholdersOther

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other WFEAverage

0

20

40

60

80

100

Equity OptionsBondInv.Fund ETFs Warrants Other Financial Products

VARIETY OF PRODUCTSACCORDING TO LEGAL STATUS

(in 2000)%

Futures


ment problems in developed countries, especially in Europe,and the creation of corporate retirement plans for employees,will most likely boost the use of this type of product.

Listing of ETFs growing among the Federation’s members

Exchange Traded Funds (ETFs) were listed and traded in nearly30% of the Federation’s exchange members. For a relatively newinstrument, this represents a high percentage of occurrence.ETFs, or index shares, are listed units of an index fund. The indexshares combines the benefits of indexing, allowing for an effec-tive diversification, with those of share trading, permitting real-time market value and speed. ETF investors can buy and sellthe shares included in the fund in a single transaction.

ETFs were present in all exchange groups, but privatized andlisted exchanges were the category with the highest per-centage of exchanges offering this instrument. ETFs were pre-sent in 33% of exchanges belonging to these two categories.Listing of ETFs in the other exchange groups ranged from20% in the "other" legal structure exchanges group to 22%in legal company exchanges.

Variety of financial products offered by all exchange categories is wider than ever

The era of offering investors a limited range of share andbond products belongs to the past. All kinds of exchangeshave significantly expanded their range of products. This caneasily be explained by the fact that bourses in general, andnot only the privatized and listed ones, have become morerevenue-oriented, managing their business more as com-mercial entities whose aim is to make profits.

Listed exchanges offer a wider range of securities products to customers than the other categories of bourses, includingprivatized exchanges

The range of products proposed by listed exchanges exceededthose offered by the three other legal groups. The listing oftheir own shares perhaps put an extra burden on listedexchanges, as their value and the dividends paid to ownersare linked to commercial success. They thus have to offer awidest range of products to increase their earnings. This maybe some of the reason at any rate. It may also in part be thelevel of investor development and sophistication in the localjurisdiction that explains this demand.

1.4 Membership/Access to the market

Exchanges with inside ownership (legal companies group)had a significantly higher number of members comparedto bourses with outside ownership

Responding Federation exchanges had, on a weighted average, 361 members (brokers, dealers, market intermedi-aries) per bourse in 2000, a large increase compared to319 members in 1999. This average hides two disparities :among exchanges, and within exchange groups.

The first difference is related to exchange size with, for exam-ple, NASD having the biggest number of members (5,592),and Colombo Stock Exchange the lowest with 15 membersin 2000.

The second difference can be noted among the four legalgroups of exchanges. Legal company exchanges had thebiggest number of members/market intermediaries, with anaverage of 488 members per exchange in 2000. One shouldremember that members/market intermediaries of thisexchanges category are often the sole owners of these bourses.On the contrary, in exchanges with outside ownership (listedand privatized exchanges), the number of members/marketintermediaries was lower with an average of 270 membersper exchange for the listed ones, and 230 members perexchange for the privatized ones in 2000. Finally, the lastposition was filled by the "other" legal structure group ofexchanges, with an average of 208 members per bourse.

1.5 Profit is becoming an aim for an increasingnumber of exchanges

63% of the Federation’s exchanges were for-profit entitiesin 2000

In 1999, for the first time ever, the number of for-profitexchanges exceeded the number of non-for-profit bourses,as for-profit bourses represented 54% of the Federation’smembers. This proportion was only of 38% in 1998. In 2000,this proportion increased again, and the search for profit wasthe aim of 63% of the Federation’s members.

This is a logical consequence of the growing number ofexchanges which privatized/demutualized, but not only. As


50

REPORTS

LegalCompanies

PrivatizedExchanges

ListedExchanges

AverageOther0

100

200

300

400

500

AVERAGE NUMBER PER BOURSE OF EXCHANGES'MEMBERS ACCORDING TO LEGAL STATUS

(in 2000)

Non-for-profit

Legal Companies Privatized Exchanges (2000)

Listed Exchanges Other Legal Structure

WFE Average

For-profit

FOR-PROFIT/NOT-FOR-PROFIT EXCHANGESACCORDING TO LEGAL STATUS

50.0%

50.0%

100%

12.5%

37.5%

87.5%

62.5%

100%

already mentioned above, all exchanges are today facing stiffcompetition and harsh commercial realities which oblige mostof them to adopt a more aggressive and market-orientedstance. With this in mind, it is interesting to note that theproportion of for-profit exchanges among the legal companybourses, those which have not demutualized, was a relativelyhigh 50%.

100% of the privatized and listed exchanges are of coursefor-profit organizations.

The only group where not-for-profit exchanges was still largelypreponderant was the “other” legal structure exchanges groupwith not-for-profit bourses representing 87.5% of theexchanges of this category. In fact, most of exchanges in thisgroup had a public status in 2000.

1.6 Profit Distribution Policy

Reinvestment of proceeds is the most common policy amongall groups

It is interesting to examine how the Federation’s exchangemembers used their proceeds, and particularly how the 63%of for-profit exchanges distributed their earnings in 2000.

At the Federation average level, the proportion of exchangeswhich re-invested their proceeds in the company increasedsignificantly in 2000, reaching 80% of all members against62% in 1999. This surge probably responded to the constantneed for new investment, particularly in technology, to seizenew opportunities and to face increasing competition fromECNs, the Internet, and also other traditional bourses.

The second most frequent distribution policy found amongthe Federation’s members was the distribution of dividendsto owners. The number of exchanges which distributed dividends in 2000 climbed to 46% from 36% in 1999. Thisincrease can easily be explained by the strong rise in thenumber of privatized/listed exchanges noted earlier in thissurvey, with their number increasing from 11 to 18 bourses.

19% of exchanges (the same proportion as in 1999) re-dis-tributed their proceeds under the form of rebates on servicesto members in 2000. Meanwhile, some interesting divergencesamong the four legal structure groups are worth mentioning.


0

20

40

60

80

100

PROFIT DISTRIBUTION POLICYACCORDING TO LEGAL STATUS

% (in 2000)

DividendsRe-invested

Rebates on ServicesOther

LegalCompanies

PrivatizedExchanges

ListedExchanges

WFEAverage

Other

LegalCompanies

PrivatizedExchanges

ListedExchanges

WFEAverage

Other0

20

40

60

80

100

LOSS FINANCING POLICYACCORDING TO LEGAL STATUS

% (in 2000)

Cash CallsIssue of Shares Bank Funding

Fees IncreasesS.E.'s ReservesOther

Privatized and listed exchanges used two main ways to dis-tribute their proceeds : dividends and re-investment

Privatized and listed exchanges used two principal ways todistribute their profits. Among the listed bourses category,an equal number of exchanges (83%) distributed dividendsto owners and re-invested their proceeds in the exchange.In the privatized exchanges group, the number of exchangesusing their earnings for dividend distribution and for re-investment purposes were 83% and 100%, respectively.

The privatized exchanges did not make much use of the pos-sibility of rebates on services, as only 17% of them did. Thispossibility was not even envisaged by any of the listed boursesin 2000.

By contrast, 23% of legal company exchanges and 25% of"other" bourses, perhaps less exposed to direct competitionand at the request of their members, choose to distributetheir earnings under the form of rebates on services.Exchanges registered under "other" legal structures paid nodividends to their owners in 2000, a logical outcome whenone knows that most of this category is composed of public or semi-public exchanges with the state or its agen-cies as owners.

The four exchange groups all used various ways to distributetheir proceeds, even if the balance between the distributionmeans was quite different from group to group. A mixed distribution policy offers the advantage of motivating thepresent owners’ interest in the exchange business while rein-forcing the exchange’s financial base and capacity to growby re-investing some profits.

1.7 Loss Financing

Most exchanges would cover a loss by withdrawing fundsfrom reserves instead of fee increases or cash calls

As other businesses do, stock exchanges can face losses andbudget deficits. To cover these shortfalls when they occur,bourses have at their disposal a wide range of answers, suchas calling on their members/owners for cash, increasing service fees, drawing on reserves, issuing new shares, appeal-ing to bank funding, etc…


52

REPORTS

At the Federation average level, a very large majority ofexchanges responding (88% in 2000 against 72% in 1999)would first use their reserves to cover the financial shortfall.

Far behind, the second most used technique (by an averageof 27% of exchanges in 2000) would consist in increasingservice fees and prices, while an average of 23% of the Federation’s members would call their members for cash.Finally, almost 20% of exchanges would have recourse tobank funding to cover their loss.

50% of listed exchanges would consider issuing new sharesto cover a possible loss

It is not surprising that 50% of the listed exchanges wouldhave recourse to the capital market and issue new shares tocover a loss. Likewise, it seems normal that almost 40% oflegal company exchanges consider making cash calls fromtheir members to cover a potential loss as they often are thesole owners.

More surprising is the relatively high proportion (almost 40%)of listed exchanges which would be ready to increase fees to

cover a loss. But it should be noted that this technique, if used, would be utilized in combination with other tools,reducing the full impact of the fee increase on customers.

2. Revenues

2.1 Overall Revenues

Revenues generated by legal companies bourses exceed by far revenues of other groups

At the overall level, total revenues generated by the Federation’s exchange members amounted to USD 6,750 min 2000 compared to USD 6,460 m in 1999, increasing by4.4% during the year.

In percentage terms, legal company exchanges generated 48%of this total in 2000. Privatized and listed exchanges repre-sented 29% and 10%, respectively, of total industry revenues,and "other" legal status exchanges produced 13% of these revenues. In absolute terms, with USD 3,220 m of revenues in2000, legal company exchanges were the most important generators of income among the Federation’s exchange mem-bers. This category in fact not only includes the largest numberof the Federation’s exchanges, but also at that time some of thelargest markets, the New York Stock Exchange and the NASD.

Compared to this category, the revenues generated by thethree other groups appeared much smaller in 2000, as shownby the graph below. Revenues generated by the group of pri-vatized exchanges came second at USD 1,951 m. Listedexchanges produced USD 632 m of revenues, while the groupof "other" legal structure exchanges generated USD 950 m.

Revenues generated by listed and privatized exchangesgrew at a more rapid pace

One of the main conclusions highlighted by the graph aboveis that revenues of each of the three groups constituted bylegal company, privatized, and listed exchanges have grownat a constant and rapid pace since 1995. In 2000, this growthrate accelerated for the privatized and listed exchanges,increasing by 18% and 11% respectively. Revenues of thelegal company group jumped by 8.7% during the same period.But then again, the bases were very different, also explain-ing some of the growth rate differential

19951998

19961999

19972000

LegalCompanies


ListedExchanges

Other0

500

1000

1500

2500

3500

2000

3000

TOTAL EXCHANGE REVENUESACCORDING TO LEGAL STATUS

USD m


Revenues of exchanges registered under "Other" legal status grew very moderately since 1995, despite the excep-tional 1999 figure

The second general feature underlined by the graph is thatrevenues generated by the "other" legal structure exchangecategory have grown very modestly since 1995, in sharp contrast with the general tendency noted in the other groups.In 1999, the important surge in "other" exchanges revenueswas due to an exceptional factor which disappeared in 2000,allowing the revenues to return to the general trend experi-enced in previous years. It is the reason why the big drop inrevenues noted in 2000 should not be taken into account.

This lasting stability of revenues since 1995 may be an indi-cation that these markets and economies were less dynamicand productive than the others. It can also signal that a pub-lic or semi-public status, for example, is less well tailored toa competitive environment. Their diverse nature make anybroad conclusion difficult.

2.2 Main Sources of Revenues

Trading and services were the most important sources of revenue

At the Federation average level, trading continued to be themain source of revenues for exchanges, representing 44% oftotal income against 40% in 1999. This figure underlines thefact that trading still remain the principal activity of exchanges.However, the weight of trading revenues in total income, atthe Federation level, has shown some small variations overtime : decreasing from 43% in 1998 to 40% in 1999, it climbedagain to 44% in 2000. This irregularity is the consequenceof the importance of trading volumes which are subject tobig fluctuations from year to year. Finally, it seems logicalthat the main activity of an exchange, trading, is also itsmain source of revenues, even if volume and revenue derivedfrom the trading business fluctuate.

Services revenues, deriving from clearing and settlementactivities, depository services, membership fees, dissemina-tion of market data and information, represented almost 30%of total revenues, an increase from the 25% registered in1999. The weight of services in total revenues has increasedfrom 21% in 1998 to 25% in 1999.

The third revenue provider was listing fees, contributing 17%to total income in 2000, against 21% in 1999, a decreaseattributable to a lower number of new companies listing in2000, and to reductions in listing fees implemented by someexchanges. Finally, “other” revenues represented 10% in 2000,against 12% in 1999

Weight of service revenues in privatized and listed exchangestotal income increased notably

When considering the industry figures by legal groupings,this general distribution more or less persists, but some interesting differences can be noted concerning the listedexchanges group. Here, service and trading revenues repre-sented almost an equal part of total revenues (38%) in 2000.It is worthwhile mentioning that the part of service revenuesin total income was higher in privatized and listed exchanges,underlying that these two categories of exchanges had a morediversified revenue structure than the other legal groups.

Meanwhile, trading revenues continued to represent the largestsource of income in privatized, legal company, and "other"exchange categories.

Listing

Other

Services

Trading

REVENUE GENERATORS (IN %) BY LEGAL STATUS

7.1%

45.5%

18.7%

28.7%

37.7%

9.3%

13.7%

39.3%

41.8%

36.0%

11.1%

40.5%

13.0%

21.8%

24.7%

11.1%

Legal Companies Privatized Exchanges

(in 2000)

OtherListed Exchanges


54

REPORTSThe high dependence of total income upon trading fees mayrepresents something of a danger for exchanges. In fact, thevolatility of markets can create important variations in trad-ing volumes from year to year, and make exchange revenuesirregular. In turn, irregularity of income flows could weakenthe investment strategy of exchanges, and jeopardize theirfuture development. Yet the industry does appear set formajor expansion in future, whatever the short term move-ments from one year to the next.

By contrast, services and listing fees normally represent amore stable source of revenues for exchanges, because theyare not directly linked to index performances and to hap-hazard events incurred in markets, though they are of coursesubject to knock-on market effects.

2.3 Detailed Analysis of Listing Revenues

Due to listing fee reductions for commercial reasons, listing revenues grew at a slower pace than new listings inthe listed exchanges and "other" legal status groups

As would be expected for the largest group in the member-ship, with USD 604 m of listing revenues in 2000, the legalcompany exchanges group generated 56% of the total Fed-eration exchanges listing income. Privatized exchanges pro-duced 21% of that total at USD 217 m, while the "other"legal structure exchanges generated 12% of the total at USD125 m in 2000. Listed exchanges, which generated 11% oftotal listing revenues at USD 112 m in 2000, came last.

It is interesting to put together the movements among thelistings and de-listings of companies during the year 2000in the four exchange categories, the total number of com-panies listed, and their listing revenues.

Legal company exchanges listed 15,820 companies (domes-tic and foreign, excluding investment funds) at the end of2000 compared to 15,467 at the end of 1999, an increase of2% between the two years. In the same time, the listing rev-enues of this category surged by 6%.

The privatized exchanges group listed a total of 7,234 com-panies at the end of 2000 compared to 7,061 at end-1999,an increase of 2%, while the revenues derived from the list-ing activities remained remarkably stable at USD 217 m in2000 against USD 219 m in 1999.Initial Fees Annual Fees Other

LegalCompanies


ListedExchanges

Other0

50

100

150

250

350

200

300

TOTAL LISTING REVENUESBY CATEGORY & LEGAL STATUSUSD m (in 2000)

19951998

19961999

19972000

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

100

200

300

400

600

500

TOTAL LISTING REVENUESACCORDING TO LEGAL STATUS

USD m


Listed exchanges had 4,215 companies at the end of 2000compared to 3,464 at end-1999, a sharp increase of 22%.Despite the surge in the number of listings, their listing revenues remained stable (USD 100 m in 1999 and 105 m in2000). Some exchanges in these two categories have in factreduced their listing fees in 2000 to attract new companiesin order to reinforce their market activities.

The same situation occurred in the "other" legal exchangesgroup, which listed 4,711 companies at the end of 2000,compared to 4,574 at end-1999, a jump of 3%. Here too,despite the increased number of listings, revenues derivedfrom the listing activity dropped by 4%. In order to keeptheir listings and attract more companies to their market,some exchanges in this category implemented listing feereductions, as Tokyo did for example.

Annual listing fees were the most important listing revenue generator

When breaking down listing revenues into annual and initiallisting fees, it is worthwhile noting that annual listing feesrepresented in all legal groups a range of 53% to 64% of totallisting revenues in 2000. Annual fees represent the more stable part of listing fees, as initial fees are paid the firstyear by newly listed companies whose number varies con-siderably from year to year.

Initial listing fees of privatized exchanges earned a muchlower USD 55 m when compared to the USD 95 m generatedby the legal companies group, even though the privatizedexchanges got a higher number of new listings in 2000. Thismeans that initial listing fees in privatized exchanges werecheaper and that, in addition to other favorable market con-ditions, the fee reductions may have served as an incentiveto attract new companies.

2.4 Detailed Analysis of Trading Revenues

Listed and privatized exchanges registered faster growthin trading revenues

With USD 1,470 m in trading revenues, legal companyexchanges, representing 50% of all reporting members trading income, were by far the most important generators oftrading fees in 2000. They were followed by privatizedexchanges with an amount of USD 816 m, accounting for 28%

of total trading revenues. Listed exchanges generated USD284 m of trading income (10% of total trading revenues) whilethe "other" legal status exchanges produced 12% of totaltrading income with USD 382 m. This breakdown conformsperfectly to the market size of each of these legal groupings.

Some general remarks can be made from the graph. Firstly,it is interesting to note that the groups composed of legalcompanies, privatized and listed exchanges registered a stronggrowth in trading revenues with rates of 10%, 24% and 12%respectively in 2000 compared with 1999. On the contrary,trading revenues of the "other" legal structure group recordeda sharp drop in 2000, and modestly increased since 1995.

The second remark is that privatized and listed exchangesregistered a higher growth of trading revenues (24% and12%) than the legal company exchanges group. Share trading values of the privatized exchanges surged stronglyin 2000 by 150%, and it is thus normal that trading revenuesreflect this increase. The contrast appears more striking whencomparing listed and legal company exchanges. In the listedexchanges group, trading value grew by 40%, inducing ajump in trading revenues of 12% ; in the legal companybourses, trading value surged by 56% but revenues linked tothis activity increased by 10% only, less than the rate recordedby listed exchanges. But again, growing off a much higherbase amount is always slower.

Trading revenues in all categories grew at a slower pacethan volumes

Exchange trading revenues tended in general to increase at amuch lower pace than volumes. For at least two reasons, therelationship between the two is not proportional. Two ele-ments may in fact explain the gap. The first one is that com-petition between exchanges is oriented around costs, and inparticular trading costs. To maintain their competitiveness,the liquidity of their market, and to attract business, stockexchanges are engaged in a cost reduction process. Reduc-tion of transaction fees is a main target for all exchanges. Theattempt to get existing clients to transact more often, andthe rivalry that opposes stock markets have had a significantimpact on trading revenues, which for the past several yearshas not increased at the same pace as trading volumes.

The second element which could explain the gap is the sliding tariff scale according to the size of the transactions :


56

REPORTS

19951998

19961999

19972000

LegalCompanies


ListedExchanges

Other0

200

400

600

1000

1400

800

1200

TOTAL TRADING REVENUESACCORDING TO LEGAL STATUSUSD m

Terminals Leasing Fees

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

100

200

300

400

600

500

TOTAL TRADING REVENUESBY CATEGORY & LEGAL STATUSUSD m (in 2000)

Transaction Fees Trade MatchingOther

the bigger the transaction is, the less it costs to trade. It iswhy most exchanges have implemented facilities for blocktrading on their markets, though only to mixed review.

In the specific case of the group of "other" legal statusexchanges, trading revenues decreased in 2000 despite asurge of 20% of their trading value, suggesting a sharp dropin tariffs by this group. Apart from this particular case, allother groups logically recorded a parallel, if not proportional,increase in both trading value and the revenues derived fromthis activity.

Transaction fees were the most important element of trading revenue

Transaction fees were the most important component of trading revenues in all groups, but particularly in the priva-tized and listed exchanges ones. These fees accounted in factfor 98% of total trading revenues for privatized exchanges(USD 554 m), and 86% for the listed exchanges category(USD 228 m) in 2000. In the legal company exchange and"other" legal status groups, transaction fees represented 55%and 77% respectively of trading revenues the same year.

The two other elements of trading revenues were trade-matching fees and terminal-leasing fees. Trade-matching feesrepresented only a marginal source of revenues for mostexchanges in 2000, except for bourses included in the legalcompanies group where they accounted for 20% (USD 196 m). It is interesting to note that the legal company exchangesgroup, the largest of the four, also has the most diversifiedstructure of trading revenues. If the majority of them camefrom transaction fees in 2000, those exchanges also gener-ated revenues from trade matching and computer terminalsleasing. In the other legal categories, these elements of trad-ing revenues were absent, or had a very limited contributionto the total trading income.

2.5 Detailed Analysis of Services Revenues

Privatized and listed exchanges are more service-orientedthan other bourses

Services were the second major source of revenue for exchangesin 2000. Service revenues described here include differentelements, such as clearing and settlement activities,


depository and computer services, membership fees, and dissemination of market data and information.

Once again, exchanges with a legal company status were thebiggest providers of service income at the Federation level.These bourses generated 46% of total service revenues atUSD 906 m, followed by privatized exchanges whose serviceincome represented 35% of the Federation total at USD 702m. At a lower level, listed bourses and those with an "other"legal status generated respectively 9% and 10% of total service income, representing USD 177 m and 206 m in 2000.

Services represented a higher part of total revenues in pri-vatized and listed exchanges, underscoring the fact that thesetwo categories of exchanges are more service-oriented, andthat in consequence they have a more diversified revenuestructure than the other legal groups.

As already noted for other categories of revenues, serviceincome generated by exchanges registered under "other"legal structures decreased, or at best was stable since 1995,as shown by the graph below. This situation could be explainedby the fact that special legal structures, as the public or semi-public one, encourage the provision of services to mem-ber/intermediaries at a modest cost or for free.

Dissemination of market data and information provided alarge part of service revenues

Dissemination of market data and information representedone the most important sources of service revenues for allexchange groups in 2000. At the Federation level, total dis-semination of market data and information revenues amountedto USD 875 m in 2000. This type of income was of particu-lar importance for privatized and legal company exchanges,representing 51% (USD 380 m) and 47% (USD 346 m) of totalservice revenues, respectively.

In listed exchanges, dissemination of market data represented43% (USD 75 m) of total service revenues, while in "other"legal status exchanges they were almost equally provided bymembership fees and dissemination of market data which rep-resented 42% (USD 87 m) and 35% (USD 72 m), respectively.

With the increasing importance of real-time information onsecurities price movements, sizes of trades, and on signifi-cant corporate news for market professionals, domestic and

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

200

400

600

800

1000

TOTAL SERVICES REVENUESACCORDING TO LEGAL STATUS

USD m

19951998

19961999

19972000

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

100

200

300

400

TOTAL SERVICES REVENUESBY CATEGORY & LEGAL STATUS

USD m (in 2000)

Clearing DepositorySettlementDissemination Computer Services Other

Menbership Fees


58

REPORTSinternational investors, the dissemination of market data hasbecome an ever more lucrative source of income for exchanges.

In addition, the globalization of markets, the widening dis-persion of data vendors combined with the reduced cost ofcommunications have allowed stock exchanges to gain accessto a very broad customer base. It is thus not surprising thatthe dissemination of sensitive and useful information hasgained so much significance for exchanges.

Clearing, settlement, and depository activities was animportant source of service income for listed exchanges

At the Federation level, the revenues generated by clearingand settlement operations, including also depository activ-ities, reached USD 430 m in 2000. This type of income wasthe first source of service revenues for listed exchanges, whilein other groups their importance was very marginal.

In listed exchanges in fact, clearing and settlement activi-ties generated a slightly higher part of service income thanmarket data dissemination, as they represented 67% (USD119 m). This situation can be explained by the fact that clear-ing and settlement organizations were integrated under theexchanges’ roofs before their privatization, and thus theirservices revenues also include those of the clearing and set-tlement activities.

The situation was quite different in other exchange groups,except up to a certain extent in the privatized exchanges,where the clearing and settlement organizations were stillindependent, and thus their financial results did not appearin the accounts.

Finally, computer services to members accounted for a smallpart of service revenues in listed exchanges and legal com-pany exchanges (13% and 9% respectively).

2.6 Analysis of Other Revenues

These revenues include diverse elements, such as system salesincome, proceeds of financial investment, fines imposed byexchanges on members or traders, and rent from exchangebuildings or space to other organizations. Since the sourcesof income are so diverse, they seem to be independent of thelegal category of exchanges.

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

100

200

300

400

500

TOTAL "OTHER" REVENUESACCORDING TO LEGAL STATUS

USD m

19951998

19961999

19972000

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

50

100

150

200

TOTAL "OTHER" REVENUEBY CATEGORY & LEGAL STATUS

USD m (in 2000)

Systems Sale Financial ProductsOther

FinesRents


In 2000, other revenues generated of USD 735 m for the fourgroups, a sharp drop of 20% in 2000 compared to 1999. Thisimportant decline can be explained if one considers that lastyear’s figure was inflated by an exceptional income in the"other" legal structure group, as shown by the graph below.In 2000, these revenues have returned to their long term trend.

The "other" legal structure and the legal company exchangeseach produced around 31% (USD 228 m) of this category of rev-enues, while the privatized and listed exchange groups gener-ated 29% (USD 216 m) and 8% (USD 61 m) respectively in 2000.

Financial investment proceeds was the most importantsource of "other" revenues

The most important source of "other" revenues in all legalgroups was the proceeds of financial investments, which

included interest earned on cash reserves and financial prod-ucts. As in 1999, the "other" legal status exchanges earnedthe biggest financial income at USD 186 m in 2000, repre-senting 80% of their total "other" revenues.

In the three other groups of exchanges, financial products rep-resented percentages comprised between 78% for listedexchanges (USD 48 m), 53% for legal company bourses at USD132 m, and 38% of total other revenues for privatized exchanges(USD 83 m).

Fines and proceeds of rent from the exchange’s buildings con-tributed modestly in all groups.

Revenues earned with systems sales and technical assis-tance was not statistically significant in the industry totalsin 2000.

3. Costs by Functions

3.1 General Overview

While total costs of all other exchange groups increasedmarkedly, listed exchanges costs remained surprisingly stable

Total costs of the Federation’s exchange members amountedto USD 4,854 m in 2000, jumping by 9% compared to 1999.

Since 1995, total costs of the Federation’s exchanges havegrown at a sustained pace of 10% a year on average, increas-ing by 50% over the period 1995-2000. Meanwhile, costs byeach legal category increased at slightly different rates.

The first remark suggested by the graph below is the sharpcontrast between the regular and steady increase in total costsfor the legal and privatized exchange groupings, and theremarkable stability of listed bourses’ costs.

Revenues 1995 1996 1997 1998 1999 2000 % change00/99

Listing 671 797 797 902 1,020 1,036 1.6%initial fees 147 199 178 198 201 200 0.0%annual fees 431 452 454 488 530 457 3.2%

Trading 1,268 1,597 1,958 2,002 2,726 2,931 7.7%transaction fees 913 1,087 1,415 1,313 1,558 1,607 3.1%

Services 1,376 1,342 1,400 1,498 1,781 2,089 17.3%C.S.D. 388 376 396 405 410 430 4.9%Dissemination of market data 457 545 630 542 743 875 18%Computer 90 95 105 125 130 165 27%

Other 451 587 593 725 944 735 -22%rent 30 38 20 27 30 32 6.6%Interests/financial products 258 356 433 540 667 449 -32.7%

Total Revenues 3,830 4,380 4,837 5,121 6,464 6,751 4.4%

NB. The most important sources of income in each of the four revenue categories have been highlighted in this table. It is thus normalthat the sum of the items in each category is not equal to the category total

(In USD m)Evolution of the main revenues of the Federation’s members since 1995

of which

of which

of which

of which

60


REPORTS

Total costs of listed exchanges remained in fact more or lessstable at USD 300 m in 2000 compared to 1999, while thoseof the legal company and privatized exchanges registered adouble digit growth of 14% at USD 2,492 m, and 13% at USD1,413 m, respectively, in their costs in 2000. Costs of the"other" legal status exchanges saw a small decrease in theircosts of 6% in 2000 compared to 1999. It is clear that listedexchanges made all possible efforts to contain cost growth,and were able to do so.

3.2 Distribution of Costs by Functions

Systems costs grew at a faster pace than staff salaries during the period 1995-2000

When looking more closely at the distribution of exchangecosts by functions, it is interesting to observe how the dif-ferent categories of costs have grown over time. Stockexchanges pay for a variety of business costs, including staffsalaries, rent for premises, and costs related to computers,administration and depreciation.

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

500

1000

1500

2000

2500

TOTAL COSTSBY LEGAL STATUS

USD m

19951998

19961999

19972000

Staff costs represented the largest single expense, with anaverage of 26% of total costs at the Federation level in 2000.However, the importance of staff costs has tended to decreaseprogressively since 1995, when they represented more than30% of total exchanges costs.

The decline of the staff costs share in Federation exchangescosts was counterbalanced by the increasing part taken bythe acquisition and maintenance of computers and electronictrading systems. Not only did this surge from 15% in 1995to 23% in 2000, but in absolute terms the amount of moneypaid out for systems more than doubled between 1995 and2000 from USD 501 m to 1,008 m.

This trend was perceptible in all exchange groups, except thegroup of “other” legal status exchanges, underlying that theincreasing business volume and competition has forced alarge majority of exchanges to heavily invest in the newestand most effective technologies.

Systems costs represented the highest part of total costs ofthe privatized exchange groups at 32%, while they accountedfor 24% and 17% in the legal company and listed exchangegroupings respectively. In the "other" status exchange group,they represented only 11% of total costs in 2000.

Privatized, listed and also legal company exchanges haveadopted a more commercially aggressive stance by choosingto maintain highly sophisticated markets employing the latest technologies as they must attract new trading activityto increase their profits. Meanwhile, this policy necessitatedsubstantial investment in electronic systems, explaining therelatively high amounts of money spent by these exchangesin systems.

3.3 Profitability of the Federation’s exchangemembers by legal structure

Federation exchanges recorded an increasing return on cap-ital since 1997

At the Federation average level, stock exchanges registereda strong average return on capital of 28% in 2000, comparedto 22% in 1999, 19% in 1998 and 17% in 1997. The analy-sis of financial returns on stock exchanges’ capital confirmsthat bourses are profitable businesses.

Listed exchanges were by far the most profitable bourses

The most profitable exchanges were the listed ones, withan average return of 56% in 2000 compared to 48% in 1999,sharply increasing over the 17% return reached in 1997.One should keep in mind that these figures come from the Federation’s answering members and do not intend to represent the overall securities industry returns. By contrast, legal company and "other" exchanges were lessprofitable, with a return on capital of 13% in 2000. Mean-while, the legal company exchanges group registered a higherreturn than in 1999 (10%), while the return on capital ofthe "other" legal exchanges group dropped from 17% recordedin 1999.

Privatized exchanges recorded a return on equity capital of26% in 2000, climbing from 10% in 1999. High returns oflisted and privatized exchanges underscore the success oftheir commercial strategy, but then they have of course struc-tured their operations around this goal. Their success seemslogical though it was far from assured.

3.4 Ratio fixed costs/total revenues

At the Federation average level, fixed costs represented 54%of total revenues.

Some discrepancies can be noted among the four legal groups.Listed companies registered the lowest ratio with fixed costsrepresenting 38% of total revenues in 2000. The privatizedexchanges category had a ratio of 63%, while the "other"legal status and legal company exchanges had ratios closeto the Federation’s average, with 59% and 53% respectivelyin 2000.

One should not be surprised that listed exchanges show thelowest ratios of fixed costs to revenues, as these exchangeshave made considerable efforts to contain their costs in 2000in general, and their fixed costs in particular.

3.5 Use of IAS in financial accounts

57% of Federation exchange members used the InternationalAccounting Standards rules in their financial accountants in 2000.


StaffAdministration

Premises occupancyDepreciation

SystemsOther

LegalCompanies

PrivatizedExchanges

ListedExchanges

Other0

100

200

300

400

600

500

TOTAL COSTSBY FUNTIONS & LEGAL STATUSUSD m (in 2000)

Systems Other

Premises occupancy

Staff

Depreciation

Administration

TOTAL COSTS BY EXCHANGES LEGAL STATUS (IN %)

Legal Companies Privatized Exchanges(in 2000)

OtherListed Exchanges

19.8%9.7%

10.2%

23.6%

4.6%32.1%

12.0%14.3%

12.3%

16.7%

8.0%36.7%

26.0%

22.7%

7.6%5.7%

25.5%

12.5%

24.0%

16.7%

11.0%

10.4%

31.7%

6.3%

62


REPORTS83% of listed exchanges and 58% of privatized exchangesfollowed the IAS when establishing their financial accounts,the largest percentages among the four legal categories.Exchanges belonging to the legal company and the "other"legal structure groups were 55% and 50%, respectively, tohave used the IAS.

Conclusion

In the 1ate 1990s, along with the commercial spirit of thetime, the growth of the capital markets generally, the priva-tization and the listing of a number of exchanges led to theemergence of a new type of bourse. These exchanges trans-formed their structure into commercial businesses with openoutside ownership. The number of this new type of bourse,the privatized and listed ones, has significantly increased in2000 to represent more than one third of the Federation’smembership.

Two broad categories of exchanges can be distinguished :those bourses with inside ownership, most of the timerestricted to the exchange members such as brokers, marketintermediaries, and those bourses with open outside owner-ship, listed or not on their own market, but sharing the samecommercial behaviors and having profit as an aim.

Profit is not is not an attribute of privatized or listedexchanges only. The survey showed that 62.5% of the Federation’s exchange members were for-profit organiza-tions at the end of 2000, exceeding the simple frameworkof the privatized and listed bourses where, of course, profitis the business goal. All exchanges need to earn money toinvest and remain on-going businesses, whether for-profitor not.

The survey has highlighted the point that exchanges in general, belonging to all of the four legal categories and notonly to the privatized or listed ones, have become more market-oriented. Most exchanges have adopted more com-mercial behaviors. This significant change in attitude towards

business realities can be explained by the fact that allexchanges have to face strong growth and the same com-peting environment.

Diversification was a key aspect of their different responsesto these challenges : diversification in their shareholdersbase for privatized and listed bourses, diversification in therange of products offered to investors, and in income sourcesfor all exchanges.

The era during which exchanges offered investors a limitedrange of market products belongs to the past. In 2000, thevariety of products offered by bourses was wider than ever,going from shares and bonds to warrants, ETFs, investmentfunds, and derivatives instruments, among others.

The objective of diversification also concerned the origin ofrevenues. Dissemination of market data and information pro-vided a large part of the services revenues in all Federationexchanges. The globalization of markets and the importanceof real-time information for worldwide investors, along withprogress in communications, have given market data dis-semination greater importance. As trading revenues couldbe made more vulnerable by market developments and alter-native trading systems, exchanges have continued to developin 2000 other sources of revenues.

This environment has forced the majority of exchanges toincrease significantly the expenses dedicated to systems. Oneof the conclusions of this survey is that costs related to theacquisition and maintenance of electronic systems haveincreased importantly in all exchange categories, and at amuch faster pace than staff salaries or other expenses.

In general, exchanges made valuable efforts to keep costsunder control in 2000, but IT investments often weightedon the costs increases noted. The analyses of returns on share-holders’ equity indicated that exchanges were on averagevery profitable, with an average return on equity of 28%. Thesmall group of privatized exchanges was distinguished by amuch higher average return of 56% in 2000.


C U R R E N T P U B L I C A T I O N S

REPORTS

Federation's Annual Reports

Annual Report 2001 and earlier years available on request

Market Information

World Federation’s Market Principles Market holidays of members and other markets

Market information on members and other markets

Public Studies - Federation Surveys and External Analysis

Annual Cost & Revenue Survey Central Counter-Parties and the Stock Exchange Industry - 2001

Price Discovery and the Competitiveness of Trading Systems - 2000 Value Chain in Financial Markets - 2000

Small and Medium Size Business Markets (SMB Markets) - 1999 Clearing and Settlement Best Practises - 1999

Three Business Models for Stock Exchange Industry - 1999 Managing Market Volatility - 1999

Clearing and Settlement Best Practises – 1996

Workshop Reports

Applied Technology for Exchanges at MIT, November 2001Data Management and Vending, September 2001

Investor Education – November 2000 Matching Bits, Bytes and Business : IT Workshop at MIT - May 20003rd FIBV Emerging Markets Conference and Exhibition - April 2000

Financial Management of Exchanges, December 1999 Investigative Concepts - October 1998

Stock Exchange-Issuer Relations - September 1998Market Technology – June 1998

Investigative Tools and Techniques – September 1997

Focus Focus, the Federation’s monthly news and statistical review

64

Bolsa de Valores de Colombia

Cairo & Alexandria Stock Exchanges

Cyprus Stock Exchange

National Stock Exchange of India

Nigerian Stock Exchange

Pacific Exchange

Stock Exchange of Mauritius

Stock Exchange Mumbai (BSE)

Trinidad & Tobago Stock Exchange Ltd

A F F I L I A T E S

EXTERNAL RELATIONS

Amman Stock Exchange

Baku Interbank Currency Exchange

Beirut Stock Exchange

Belgrade Stock Exchange

Bolsa de Comercio de Rosario

Bolsa de Valores de Panama

Bolsa Nacional de Valores

Bourse de Casablanca

Bourse Régionale des Valeurs Mobilières

Bratislava Stock Exchange

Bucharest Stock Exchange

Bulgarian Stock Exchange

Cayman Islands Stock Exchange

Channel Islands Stock Exchange

Chittagong Stock Exchange

Delhi Stock Exchange Association

Ghana Stock Exchange

Iceland Stock Exchange

Karachi Stock Exchange

Kazakhstan Stock Exchange

Kosdaq Stock Market

Kuwait Stock Exchange

Lusaka Stock Exchange

Nairobi Stock Exchange

Namibian Stock Exchange

Nasdaq Europe SA/NV

National Stock Exchange of Lithuania

Palestine Securities Exchange

Port Moresby Stock Exchange

Prague Stock Exchange

Riga Stock Exchange

Surabaya Stock Exchange

Swaziland Stock Exchange

Virt-x Exchange Limited

Zagreb Stock Exchange

C O R R E S P O N D E N T S

EXTERNAL RELATIONS


The East Asian and Oceanian Stock Exchanges Federation(EAOSEF), which currently comprises 15 stock exchanges,originated in 1982 as an informal organization called theEast Asian Stock Exchanges Conference (EASEC). Its objec-tives were to promote friendship and to facilitate the exchangeof information among member exchanges.

Later, in 1990, the organization was enlarged by the addi-tion of stock exchanges from the Oceanic region. It was atthis time that the organization adopted a formal constitu-tion and reorganized itself as an official international feder-ation of stock exchanges called EAOSEF.

In 1998, in recognition of the rapid developments in com-munications as well as in the financial markets, EAOSEF decidedto increase its responsiveness by establishing a task organi-zation. After a thorough study of members’ responses to aquestionnaire and full deliberation by the working group andthe General Assembly, EAOSEF revised its Charter and alteredthe basis of its membership system from a country-based oneto the more liberalized exchange-based system that it hastoday. At the same time, a standing committee of the fed-eration was also established. The newly established EAOSEFstanding committee is known as the Working Committee.

There are three organs in EAOSEF: the General Assembly, Working Committee and Secretariat.

The supreme decision making body of EAOSEF is called theGeneral Assembly, which meets annually at a pre-determined

venue provided in rotation by member stock exchanges. Thepresiding Chairmanship of EAOSEF also rotates, passing fromthe head of one host exchange to the next, immediately uponcompletion of each General Assembly.

The Working Committee, which is regarded as the standingwork force of EAOSEF, is composed of one delegate from eachmember exchange. Besides periodically holding general dis-cussions, its basic function is to take care of research workand to study key issues or concerns, which may either bereferred to it by the General Assembly or be selected by itselfafter deliberation at one of its meetings.

Facilitating communications among member exchanges andthe management of day-to-day EAOSEF affairs is the respon-sibility of the standing Secretariat. Currently, the Secretariatis provided by the Tokyo Stock Exchange, where it has beenlocated since 1982.

Through the historic revision of the Charter in May 1998,most of the issues dealt with by the EAOSEF General Assem-bly were focused on very pragmatic and vital concerns toall federation members. The fruits of their studies and discussions have been equally shared by all EAOSEF mem-bers; so far, satisfactory results were achieved under thesubject of Y2K Readiness, Cross Border Trading (actual crossborder trading linkage has been in operation, since the middle of December 2001, between two of the mem-ber exchanges of EAOSEF), Human Resources Survey andthe like.

E A O S E F

EAST ASIAN AND OCEANIANSTOCK EXCHANGES FEDERATION

EXTERNAL RELATIONS

The Federation currently is represented by 23 members in 21 countries, consisting of over 7,000 traded companies witha market capitalization of US $109 billion.

Traded companies are down 27% over 2000, and market cap-italization down 21% in the same period, but with stockshare volume soaring to a record 96.7 billion average dailyvolume, or a 114% increase over 2000.

Fluctuations in US $trading volume statis-tics were greatlyimpacted by currencydevaluations through-out the year. In addi-tion, during the year2001 FEAS member sta-tistics in Bond and"Other" volume were

added to the statistical reporting pool. Regional statisticsshow that "Other" volume, representing currency, t-bills,repo/reverse repo, derivatives among other instruments, rep-resents 81% of the total market volume for all financial instru-ments traded on member exchanges.

A five-year consolidated statistical comparison between 1998and year to date 2002 shows the post privatization consolida-tion of listed/unlisted companies, but growth steadily sustained.

In organization news, the General Assembly approved themembership applications of the Baku Stock Exchange and theMuscat Securities Market. The Istanbul Stock Exchange willbe chairing the Technology Working Committee; the AmmanStock Exchange the Marketing Working Committee; and theTehran Stock Exchange the Rules & Regulations Committee.

Special Projects last year included a two-part IT Conferencein Houston, Texas, in February and November of 2001, as partof the FEAS Training Program. The seminar had been orga-nized and sponsored by the ISE/FEAS and the University ofHouston. The program was designed for IT personnel andnon-IT executives of FEAS member exchanges.

In conjunction with the OECD, the Federation has jointlydesigned and implemented a program entitled "Private Sec-tor Development", which deals with the enhancement ofsmall- and medium-sized companies in national economies.This will promote enterprise development and best practicesfor entrepreneurship, and also the role of stock exchanges infinancing. On 22 October 2001, a FEAS conference was heldto set a strategy for private equity financing in developingmarkets. Activity in this area is ongoing within the confinesof emerging market education of both potential governmentand private issuers. In addition, a joint publication of "BestPractices for Stock Market Operations" in the region was pre-pared and distributed.

The Federation continues to work towards a common trad-ing platform for exchanges within the region. Key work beingdone on an UN-sponsored program is part of the Southeast-ern European Economic Initiative (SECI). Currently, a FEASdata center combines all statistics across members, and theFEAS Rule Book outlines the common rules and regulationsto accomplish this task.

66

F E A S

StocksOther Bonds

81.0%

13.0% 6.0%

FEDERATION OF EURO-ASIAN STOCK EXCHANGES

Category 1998 1999 2000 2001 YTD 2002# Companies Traded 8,556 10,018 9,783 7,072 7,072Market Capitalization (US$ Millions) 102,945 201,649 138,658 109,410 114,331Total Volume (US$ Millions-Stocks) 94,448 125,932 240,440 103,873 11,107Total Volume (# Shares Millions-Stocks) 2,272,007 5,870,710 11,140,759 23,973,696 3,053,683Average Daily Volume (US$ Millions-Stocks) 383.8 527.0 977.5 422.0 519.0Average Daily Volume (# Shares Millions-Stocks) 9,165.4 24,868.6 45,289.3 96,673.9 145,388.7Total Volume (US$ Millions-Bonds) 47,146.5 5,144.1Total Volume (# Shares Millions-Others) 630,319.6 31,477.4

*YTD 2002 figures represent statistics for January only. The Federation of Euro-Asian Stock Exchanges provides statisticsfor members on a monthly basis.

Statistical Comparison 1998-YTD 2002

Regional Development:

Historical Data Not Available

EXTERNAL RELATIONS


F E S E

Preparations for the physical transition to the euro domi-nated the year 2001 in Europe. In the event, the transitionin early 2002 went incredibly smoothly.

The foremost issues for European capital markets in 2001have been the legislative and regulatory impact of the Euro-pean Commission’s Financial Services Action Plan. This hasdemanded the utmost attention from all market participants.

As the European Union moves towards the full review of theInvestment Services Directive (ISD), the Commission issuedseveral discussion papers and held a number of hearings towhich FESE Secretariat and members made strong represen-tations. Among the points raised were:

• how to reach a level-playing field with the advent of Alter-native Trading Systems and Electronic Communication Networks;

• the regulation of internalisation of order flow;• the definition of a regulated market;• how well a private investor should be protected;• how to define the difference between a private and a

professional investor.

Whilst welcoming the decision by the Commission to over-haul the Prospectus Directives as a top priority in the Finan-cial Services Action Plan, FESE deplored the lack of wide con-sultation in advance and believes the Commission has failedto properly meet one of its key objectives, namely to providefor a truly single market for issuers across the Union.

In response to the Commission’s Draft Directive on MarketAbuse, FESE suggested that defining, prosecuting and pun-ishing market abuse solely at the European or national level,and primarily through court procedures, is likely to fail thetest of effectiveness. Preferable is an approach that fostersco-operation between governments, regulators, and self-regulatory or contractual organisations.

The European Parliament, Commission and Council took thebest part of 2001 to discuss inter-institutional balances onsecondary regulation for capital markets and reached a com-promise early in 2002. Mr. Lamfalussy’s Committee proposedwide consultation in a transparent environment and FESEnotes the clear intentions of the European Commission andCESR to implement these recommendations.

At the international level, the changeover of the top of bothSEC and CFTC in Washington has increased hope that the issueof access of American intermediaries and investors to Europe’selectronic exchanges may be discussed in a more construc-tive fashion than in the past.

Any review of the year 2001 cannot be complete without anevocation of the terrible events of 11th September. Europeansecurities exchanges expressed their sadness for the victimsand their solidarity with the American capital market organ-isers. The vulnerability and the strength of the transatlanticcapital market system were proven by those events.

FESE’s membership continues to grow and now counts some27 full members and 6 associate members. FESE Statutes were re-written to attract into membership new types of secu-rities markets, and also futures and options markets, andclearing houses.

In June 2001, the 5th European Financial Markets Conventionin Paris was attended by over 400 delegates. The Federation’ssecond Josseph de la Vega Prize for research related to thefuture of securities markets was awarded to Albert J. Menkveldfor his study on "Splitting Orders in Fragmented Markets – Evidence from Cross-Listed Stocks" and to Nóra Szeles andGábor Marosi from Budapest for their paper "Isolation or Asso-ciation: A Difficult Choice for a Regional Exchange - the Exam-ple of the Budapest Stock Exchange".

FEDERATION OF EUROPEANSECURITIES EXCHANGES

EXTERNAL RELATIONS

68

F I A B V

Pooling the efforts and resources of the major stock exchangesand securities markets in Latin America, Spain, and Portu-gal, FIABV has continued to work toward defining alterna-tives for linking up and integrating its constituent organi-zations. One underlying goal of this effort is to identify newbusiness opportunities and to generate shareholder value inthese securities market institutions. The national integrationinitiatives undertaken recently by FIABV member exchangeshave contributed novel approaches, perspectives, and expe-riences that will clearly enrich a larger integration project.

FIABV held its General Assembly in Costa Rica on September10-11, 2001. As the second-day session was in progress, newsof the tragic events in the USA elicited unreserved condem-nation from the representatives of the Ibero-American securities market community assembled there, as well as theirdeepest sympathy for the victims and their families.

Among other topics, and in addition to regional market inte-gration, the General Assembly addressed the development ofnew securities market products and business, the promotionof stock market investment and investor protection, andupdates on clearing and settlement issues.

The Assembly appointed a new Executive Committee and anew FIABV President. Augusto Acosta Torres (President ofthe Colombia Stock Exchange) and Rolando Duarte (Presi-dent of the El Salvador Stock Exchange) were respectivelyelected President and Vice President. The other members of

the Executive Committee are the Presidents of the Sao Paulo,Santiago, Costa Rica, Madrid, Mexico and Lisbon-and-PortoStock Exchanges and the Buenos Aires Securities Market.

The Working Subcommittee, chaired by the Sao Paulo StockExchange until late November 2001 and, since then, by theMexican Stock Exchange, has worked on various technicalissues relevant to the regional integration process. Bovespacoordinated a comprehensive study of existing connectivityand link-up conditions among the member Exchanges; BuenosAires systematized a study on the main restrictions and regulatory constraints that might prevent the achievement ofan effective operational integration of the Ibero-Americansecurities markets; and Mexico is currently processing theresults of a questionnaire designed to identify opportunitiesfor, and barriers to, market integration in Latin America, whichwill help focus FIABV’s work on technical issues in 2002.

The FIABV Library has joined a major Library InformationNetwork that links 27 networks and over 400 institutions.The Library section of FIABV’s website has been redesignedand now has more dynamic features and a faster, more powerful database on line search engine.

In line with its traditional policy, FIABV has continued tomaintain active relationships with other international orga-nizations (such as the World Federation of Exchanges) andvarious regional institutions focused on the development ofcapital markets.

FEDERATION OF IBERO-AMERICANEXCHANGES

EXTERNAL RELATIONS


I O M A / I O C A

IOMA / IOCA is the association representing derivativeexchanges and clearing houses. Today it counts more than50 members from around the world.

The Annual IOMA / IOCA Meeting was hosted in June by theAustralian Stock Exchange and the Sydney Futures Exchange,and reviewed several of the central issues facing the deriva-tives markets, including payment for order flow, linkagesbetween derivative markets, and demutualization ofexchanges. A roundtable on issues concerning clearing houseswas held, and the IOMA Derivative Market Survey was pre-sented on industry trends.

The Annual Meeting also included a workshop organized bythe World Federation of Exchanges (formerly FIBV) on thedevelopment of single (or universal) stock futures. The con-junction of the equity markets and the derivatives marketsis evident in the launch of this product, and has been promi-nent news in global finance. The convergence of stockexchanges and derivative exchanges continued in nationalmarkets such as South Africa’s and Malaysia's, as did mergers on an international basis in the case of the IPE/ICEand the Euronext purchase of Liffe.

The volatile cash markets which marred much of 2001 drovetransactions on derivative markets around the world to newrecords as investors sought to manage and benefit from risk.The financial infrastructure proved to be resistant to shocksbeyond all expectation. Post-trade services generally, andclearing houses in particular, managed to cope with severedisruptions.

The President of IOMA is Mr. Yair Orgler, of the Tel Aviv StockExchange. The President-elect is Mr. Colin Sculley of the Aus-tralian Stock Exchange. The President of the InternationalOptions Clearing Association is Mr. George Hender of theOption Clearing Corporation.

The members of IOMA / IOCA are:• American Stock Exchange• Athens Derivatives Exchange Clearing House• Athens Derivatives Exchange, S.A.• Australian Stock Exchange• Board of Trade Clearing Corporation• Bourse de Montreal• Canadian Derivatives Clearing Corporation• Chicago Board of Trade

• Chicago Board Options Exchange (CBOE)

• Chicago Mercantile Exchange• China Zhengzhou Commodity

Exchange• Eurex Frankfurt AG• Eurex Zurich AG• Euronext - Amsterdam• Euronext - Brussels• Euronext - Paris• Helsinki Exchanges• Hong Kong Exchanges• Hong Kong Exchanges and Clearing Limited• International Options Markets Association (IOMA)• International Petroleum Exchange• International Securities Exchange• Italian Exchange• Korea Stock Exchange• Kuala Lumpur Options & Financial Futures Exchange• LIFFE• London Clearing House• London Metal Exchange Ltd.• Malaysian Derivatives Clearing House Berhad• MEFF• MEXDER Mercado Mexicano de Derivados• New York Board of Trade• New York Mercantile Exchange• New Zealand Futures & Options Exchange• Norwegian Futures & Options Clearing House, The• OM Gruppen• OM London Exchange Limited• OM Stockholm Exchange• Options Clearing Corporation, Inc., The• Osaka Securities Exhange• Oslo Stock Exchange• Pacific Exchange• Philadelphia Stock Exchange• Sao Paulo Stock Exchange• SGX America, Ltd.• Singapore Exchange• Sydney Futures Exchange• Taiwan Futures Exchange Corp. (TAIFEX)• Tel-Aviv Stock Exchange• The Stock Exchange of Thailand• Tokyo Stock Exchange• Wiener Borse AG

INTERNATIONAL OPTIONS MARKET ASSOCIATIONINTERNATIONAL CLEARING HOUSE ASSOCIATION

Yair Orgler,Tel Aviv Stock Exchange and

IOMA/IOCA President

EXTERNAL RELATIONS

70

INTERNATIONAL FINANCIAL ORGANIZATIONS

At the request of the President and the Board of Directors,the Secretariat will be stepping up its work relations withinternational financial organizations, in order to affirm theimportance of exchanges in policy forums. Examples of workinclude :

Bank for International Settlements : at the request of mem-bers, the Federation has gone to the Basle Committees toraise the issue of OTC instruments of various kinds linked toexchange-based products, both individual equities as well asequity indices. The market for them has grown tremendously,and these specific, unfungible products have been havingquite an impact on exchange surveillance work and the trans-parency of price discovery on regulated markets. The bank-ing community is intensely involved in this question, too.

Also, the Secretariat advised the Basle Committee on Pay-ment and Settlement Systems on its "Recommendations forsecurities settlement systems", a report published jointlywith the IOSCO Technical Committee in November 2001.

International Organization of Securities Commissions(IOSCO) : Frequent contact is maintained between theWorld Federation of Exchangesand IOSCO Secretariats. Aneasy dialogue is crucialbetween these two organiza-tions; messages pass clearly.On occasion, the Federationwrites opinions representativeof broad stock exchangeindustry views when IOSCOsubmits its working papers topublic review.

More formally, these organizations continue to meet on anannual basis. The World Federation was invited to attend theIOSCO Annual Meeting in Stockholm in May where the Fed-eration’s Board of Directors met with the IOSCO TechnicalCommittee. It has also become a custom to have represen-tatives from the regulatory community join the FIBV AnnualMeeting. This year in Madrid, David Brown, Chairman of theIOSCO Technical Committee, and Paul Wright of the FSA,joined the debates.

On behalf of member exchanges, and in consideration of theirbusiness needs, the World Federation remains a strong advo-cate of cooperative regulation. This means that regulatoryresponsibilities should be allocated within the framework ofa continuing dialogue between an exchange and its regula-tor, entrusting those aspects of regulation and oversight tothe partner best suited to do the job. Under the overallumbrella of regulatory quality, this will add the essentialingredients of efficiency and affordability to the regulationthat all market participants need.

Organization for Economic Co-operation and Development(OECD) : the Federation has had longstanding ties to thisneighbor organization in Paris, getting regular speakers fromthe OECD and participating in such projects as the OECD/WorldBank guidelines on corporate governance, and the OECD workon developing venture capital. This year, the Secretary General was one of the editors of the OECD/FEAS report on"Best Practices for Stock Market Operations."

World Bank : the Secretariat has begun working with theFinancial Sector Policy and Strategy Department within theInvestment Department. The World Federation of Exchangeshas longstanding relations with the World Bank’s InternationalFinancial Corporation (IFC) and has lent advice to it. The IFChas also sent participants to the Federation’s work programs.

David Brown, Chairman of theIOSCO Technical Committee,during the Annual Meeting inMadrid

EXTERNAL RELATIONS

2 0 0 1


REVENUE AND EXPENSESYEAR ENDED DECEMBER 31, 2001

2001 2000(€) (€)

REVENUE

Member dues 2 394 000 2 245 800Affiliate & correspondant fees 69 379 69 532Net profit on disposal of trust funds (note 2) 179 042 319 513Income from sale of tangible assets 56 248 0Income from marketable securities 23 479 13 063Miscellaneous 7 914 10 636

___________ ___________

2 730 062 2 658 544

EXPENSES

Office costs 332 843 328 156Amortization (note 4) 41 528 78 532Salaries & social charges 1 008 531 974 939Retirement costs 16 529 0Post, telephone & internet 50 113 57 323Publications, events & associated travel 725 901 727 562Provision for legal liabilities (note 6) 100 000 0Book value of tangible assets sold 40 553 0Miscellaneous 59 255 30 540

___________ ___________

2 375 253 2 197 052

EXCESS OF REVENUEOVER EXPENSES 354 809 461 492

SURPLUSYEAR ENDED DECEMBER 31, 2001

Reserve Operational TotalFunds (€) Reserve (€) (€)

December 31, 2000 2 754 330 914 694 3 669 024Excess of revenue over expenses 354 809 354 809

________ ________ ________

December 31, 2001 3 109 139 914 694 4 023 833

The operational reserve was set up to agregate funds from any losses, so that the Federation would have fundsto meet costs in case of an emergency.

The reserve funds are the retained operating surpluses.

F I N A N C I A L A C C O U N T S

72

F I N A N C I A L A C C O U N T S (C O N T I N U E D)

CHANGES IN CASH RESOURCESYEAR ENDED DECEMBER 31, 2001

2001 2000(€) (€)

OPERATIONS

Excess of revenue over expenses 354 809 461 492Amortization -22 311 30 095Provisions 53 019 -41 356Changes in other assets and liabilities -154 359 72 584

_________ _________

Source of cash 231 158 522 815

FINANCING 0 0

INVESTMENT

Fixed assets 9 006 -35 121Medium term investments 0 1 066 441Long term investments -479 438 -398 495

Increase in Cash 231 158 522 815Cash position, beginning of year 2 125 511 969 871

___________ _________

Cash position, end of year 1 886 237 2 125 511

Cash position

Cash 373 1 174Bank accounts 15 957 24 260Short term investments 1 869 907 2 100 077

___________ _________

1 886 237 2 125 511


BALANCE SHEETDECEMBER 31, 2001

2001 2000(€) (€)

ASSETS

Cash 373 1 174Bank accounts 15 957 24 260Short Term Investments (note 3) 1 869 907 2 100 077Receivables 5 820 6 232Prepaid expenses 6 799 30 690

_________ _________

Current assets 1 898 856 2 162 433

Net fixed assets (note 4) 86 982 64 541Loans 9 587 11 916Deposits of guarantee 23 496 30 303Long Term Investments (note 3) 3 085 848 2 606 410

_________ _________

Long-term assets 3 205 913 2 713 170_________ _________

5 104 769 4 875 603

LIABILITIES

Unearned dues 0 114 000Accrued payroll and social charges 183 977 212 645Accrued expenses 61 044 91 358

_________ _________

Current liabilities 245 021 418 003

Retirement provision (note 5) 735 915 788 576Provision for legal liabilities (note 6) 100 000 0

MEMBERS' EQUITY

Operational reserve 914 694 914 694Reserve funds 3 109 139 2 754 330

___________ ___________

5 104 769 4 875 603

74


NOTES TO FINANCIAL STATEMENTSDECEMBER 31, 2001

1. GOVERNING STATUTES ANDNATURE OF OPERATIONS

The World Federation of Exchanges is a not-for-profit orga-nization incorporated under the provisions of the 1901 Lawon Associations (France). The purpose of the Federation isto contribute to the development, support and promotion oforganized and regulated securities markets.

Seven persons were employed during 2001, and the outgoingSecretary General was also on the payroll for the first fourmonths.

2. ACCOUNTING POLICIES

The financial statements have been prepared in accordancewith generally accepted accounting principles in France, inparticular the historical cost. In past years, there were nomaterial differences with IFRS (IAS), the set of principlesmember exchanges support for reporting. For 2001, however,there is a material difference, and the Federation is forcedto follow French GAAP. These statements do not take therequirements of IFRS (IAS) 39 into account, which came intoforce for periods beginning on or after 1st January 2001.

The effect comes in the reporting of investment funds, byfar the major asset. To realign reporting with IFRS (IAS) infuture, nearly all public funds were sold on the last tradingday of 2001 in order to re-establish their cost base. Therewas no fiscal impact, because the Federation is a tax-freeassociation.

DepreciationFixed assets are depreciated over their estimated useful livesaccording to the following methods and annual rates :

InvestmentsThe OPCVM (trust funds) are stated at cost and are used toinvest cash, the retirement provision, the operational reserveand the reserve fund. The historical cost of investments heldat the closing date is accounted for using the first-in, first-out method.

Under IFRS 39, the reserve fund at 1st January 2001 wouldamount to 3.047.832 € and the excess of revenue overexpenses for the year ended 31 December 2001 to 130.102 €.Instead of the net profit of 179.042 € on disposal of trustfunds, the fair value gains or losses and the gains or losseson sales relating to available-for-sale investments wouldamount respectively to 50.739 € and –150.734 €, and thegains or losses relating to trading investments to 54.330 €.

Methods Rates

Office furniture Straight-line 10% or 20%

Improvements Straight-line 20%

Computer equipment Straight-line 33%

Computer system Accelerated depreciation 50%, 25%, 25%

Office equipment Straight-line 20% or 33%


3. INVESTMENTS

TRUST FUNDS (€) Quantity Balance sheet Valuation Potential(historical cost) (quotation) gain or loss

Natio court terme 390 948 013 978 081 30 068Placements monétaires 1 201 258 201 415 157Placements court terme 66 107 807 107 873 66Fima Trésorerie 185 612 829 613 771 942Short term investments (<1 year) 1 869 907 1 901 140 31 233Fleming France Sélection 200 62 914 66 046 3 132HSBC Pan European 6 500 202 475 207 398 4 923Fidelity European Growth 66 000 463 452 478 500 15 048Templeton US Equities 7 000 102 473 108 102 5 629CDC Euro Souverain 900 232 416 231 543 -873Mercury US $ Global Bond 5 000 92 994 94 746 1 752Natio Fonds Euro Convertibles 7 750 297 678 297 678 0Baring World Bond 14 000 226 940 225 400 -1 540Groupama Oblig France 800 307 976 307 128 -848Frank Templ Global Euro 10 000 138 852 142 063 3 211Mercury Euro High 11 000 87 890 88 880 990Indo Strat Monde 570 110 745 110 785 40Adi Convex FCP 85 163 994 164 121 127Victoire Oblig Intl 1 600 130 640 130 736 96CPR World Capi 90 337 237 337 184 -53Nordea 1 North Amer 400 127 172 133 131 5 959Long term investments (>1 year) 3 085 848 3 123 441 37 593

4 955 755 5 024 581 68 826

4. FIXED ASSETS (€)

Office Improve- Computer Office Transport TotalFurniture ments equipment equipment equipment

Cost at 31 December 2000 33 592 4 450 70 803 59 969 48 584 217 398Additions 2 521 34 276 17 199 50 526 104 522Disposals -2 451 -53 357 -48 584 -104 392Cost at 31 December 2001 36 113 38 726 85 551 57 138 0 217 528

Accumulated depreciation at 31 December 2000 27 959 3 469 54 394 54 417 12 618 152 857Additions 3 076 6 057 14 006 17 309 1 080 41 528Disposals -834 -49 307 -13 698 -63 839Accumulated depreciation at 31 December 2001 31 035 9 526 67 566 22 419 0 130 546

Net book amount at 31 December 2000 5 633 981 16 409 5 552 35 966 64 541Net book amount at 31 December 2001 5 078 29 200 17 985 34 719 0 86 982

5. RETIREMENT PROVISION

The retirement provision is for pension rights granted to former employees. This provision amounts to 735.915 € as of December 31, 2001. The pension commitments of a previous Secretary General represent 672.592 €, and have been estimatedaccording to her life expectancy and actuarial assumptions. The pension commitments of the present employees stand at63.323 € and have been valued according to the agreement made between the French stockbroking community and employees,staff turnover, life expectancy, and actuarial assumptions.

6. PROVISION FOR LEGAL LIABILITIES

A provision for legal liabilities has been made as a prudent act by management. There is no fiscal effect.

STATUTORY AUDITORS' REPORT ON THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2001

(TRANSLATED FROM FRENCH INTO ENGLISH)

WORLD FEDERATIONOF EXCHANGES

Gentlemen,

In compliance with the assignment entrusted to us by your General Assembly meeting, we hereby report to you,for the year ended 31 December 2001 on :

- the audit of the accompanying financial statements of the WORLD FEDERATION OF EXCHANGES,- the specific verifications and information required by law.

These financial statements have been approved by the Executive Committee. Our role is to express an opinionon these financial statements based on our audit.

1. OPINION ON THE FINANCIAL STATEMENTS

We conducted our audit in accordance with the professional standards applied in France. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial state-ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting princi-ples used and significant estimates made by management, as well as evaluating the overall financial statementspresentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements give a true and fair view of the Federation's financial position and itsassets and liabilities as of 31 December 2001, and of the results of its operations for the year then ended inaccordance with accounting principles generally accepted in France.

2. SPECIFIC VERIFICATIONS AND INFORMATION

We also performed the specific verifications required by law in accordance with the professional standardsapplied in France.

We have no comments as to the fair presentation and the conformity with the financial statements of the infor-mation given in the management report of the Secretary General, and in the documents addressed to you withrespect to the financial position and the financial statements.

Paris, 6 February 2002

CONSTANTIN ASSOCIESStatutory Auditors

Dominique LAURENT Jean-François SERVAL

76



2 0 0 1 M A R K E T P E R F O R M A N C E

Economic recession and terrorist attacksleft world stock markets with losses in 2001, even after a solid rebound

In 2001, markets were confronted with the continuing weak-ness of the world’s leading economies, the shockwave created by September 11th terrorist attacks on the US soil,and the ensuing confidence crisis among investors with regardto certain sectors of the economy.

The terrorist attacks in New York and Washington had atremendous impact for several weeks not only on financialmarkets around the globe, which could be measured by heavydrops in stock price index levels, but also a considerableglobal psychological impact on investor and consumer sen-timent increasing notably their gloominess about the future.That gloom dissipated only slowly in the following weeks.

For the global economy, the attacks happened at a very critical time as the three major economic poles (US, Europe,and Japan) were already experiencing a downturn in theireconomic growth, or were already in recession. Japan con-tinued to experience particular difficulties while Europe wasdragged down by the global downturn. Other regions, as forexample South East Asia, because of its high dependence onthe US economy and technology spending, could not playthe role of locomotive. Fortunately, other Asian countries didexperience good growth, notably China, India, and SouthKorea.

Most economists generally believed before the attacks thatif the world had barely avoided recession, it was largely thanksto the buoyancy of consumer expenditure and strong confi-dence. However, after the attacks, the situation changed withinvestors becoming more nervous about the prospects forthe world economy. They worried that the sharp fall in shareprices reducing households‘ wealth, and the rise in unem-ployment, would hit consumer expenditures, sending theworld economy into certain recession.

In addition, the drastic change in the world’s sentiment aboutsecurity and fears of further attacks contributed to fuel widespread pessimism.

In order to prevent a worsening of the economic situationand a systemic crisis, the Fed and other central banks imme-diately responded with interest rate cuts and injected extra

liquidity into the financial system. On their part, market regulators of the securities industry in the US and elsewherealso took appropriate measures to alleviate the impact onthe markets of the terrorist assaults. Their task was to ascer-tain the physical integrity of market infrastructure and participants, to restore order, and so avert an immediate crisis of confidence. These rapid reactions demonstrated thecapacity of the global financial system to respond to criticalsituations with immediate measures, and so demonstratetheir resilience.

The cooperation between exchanges and regulators was crucial to limit the negative impact on markets. Among othermeasures, the US SEC allowed issuers to repurchase theirsecurities without meeting the volume and timing restrictions that ordinarily apply. Thanks to this and othermeasures, and even after share prices experienced a sharpdrop around the globe, there was no panic among investors.After several days of closure in the US, and in other coun-tries especially in Asia, exchanges reopened orderly, and control returned to bourse trading

At the Federation level, members’ stock price indexesfell by a weighted average of 18.6% in US dollar termsin 2001

Due to this difficult economic situation, and despite a rallyof equity markets during the last quarter of 2001 fuelled bythe assumption that the US economy would recover after theFed’s eleven interest rate cuts in 2001, world markets endedthe year disappointingly. The drops were especially sharp inthe TMT sector, and in certain countries.

After a decline of around 13% in 2000, global equity markets once again experienced a new fall in 2001 : on amarket capitalization-weighted basis, the Federation mem-ber exchanges performance registered, on average, a declineof 18.6% in stock price indexes expressed in US dollar termscompared with 2000.

Some differences can, however, be noted among time zones.Although registering a negative performance in terms of stockindexes, the North American region, which includes the UnitedStates, Canada, and Mexico, was the “best” performer in 2001with an average decline of 12.5% on a market capitalization-weighted basis. Among the three countries composing the

78


region, only Mexico recorded a significant increase of 18.1%in its index level in 2001 expressed in US dollar ; the Nasdaqstock market, Toronto, and the NYSE all registered losses ofrespectively 21%, 19%, and 10.2%.

Europe was the worst performer in terms of stock index per-formance, as it registered an average drop of 21.9% on a market capitalization-weighted basis. Some of EuropeÕs biggestmarket indexes declined sharply and weighted on the regionalindex as Deutsche Borse (-24%), Euronext (-25%), London(-17.6%), Italy (-29%) or Swiss Exchange with Ð24%,expressed in US dollar terms, all suffered.

As Europe, South America and Asia-Pacific showed, at theregional level, a strong deterioration in their respective indexeswith falls of 19.1% and 18.5% respectively.

When turning to sector performances, like the year before, 2001was marked by a revival of the "old economy" sectors as opposedto the sector linked to the TMT (technology, media, and telecom-munications) equities. During much of 2001, in fact, even ifthe picture darkened, defensive economic sectors such as food,beverages and tobacco, were in vogue. But, towards year-end,when the equity rally came, investors turned also to growthstocks, particularly the TMT ones, as assessments began tochange on their overcapacity investment problems.

Exchanges in emerging markets in general registeredbetter performances than in developed markets

When turning to individual exchanges, one of the main char-acteristic of the period was the strong performance of mostemerging markets, wherever located in Asia, Europe, or LatinAmerica. This fact is remarkable especially when recalling thefinancial crises which affected Turkey and Argentina in 2001,and which fortunately have not spread to other emergingeconomies. This is also true when considering that mostemerging markets continued to be affected by the global eco-nomic slowdown.

Among the ten best performers in 2001, 8 were emergingmarkets0 They sometimes turned in impressive performances.South Korea was undoubtedly the best performer worldwidein 2001, registering a stock price index increase of 32.4%,expressed in US dollar terms, followed by Tehran (23.3%),Colombo (23.2%), and Mexico (18.2%).

It is interesting to note the surprising case of the IstanbulStock Exchange : one of the best performers in terms of indexperformance in local currencies in 2001, the Exchange wasalso one of the worst performers in US dollar terms. This oddsituation was due to the financial turmoil that affected Turkeyaround mid-year, and which prompted a currency devalua-tion. After the crisis, the stock market rebounded strongly,allowing the local index to gain 46.1% in local currency bythe end of the year compared to end-2000. Meanwhile, dueto the currency devaluation, the Turkish Lira lost 53.9% in2001 against the US dollar. This explains how the 46.1% gainin local currency was transformed into a loss of 32.7% of thestock price index expressed in US dollar terms.

The Buenos Aires Stock Exchange, confronted with ArgentinaÕsfinancial, economic, and political unrest, also experienced asharp drop of 18.4% in its stock price index expressed in USdollar terms. This was despite a strong rebound in December2001 when the market capitalization surged from USD 26.8bn at the end of November to USD 33.4 bn at end-December.Luckily, ArgentinaÕs financial problems failed to unsettle otheremerging markets, especially in South America. The sharp fallof the ArgentinaÕs currency had only a small impact on theBrazilian real and the Mexican peso, which both moved lowerbut then recovered much of their loses towards year-end.

The ten best performers in 2001(In terms of general index performances)

in local currency in USD

Exchange % Change Exchange % Change1. Istanbul 46.1 1. South Korea 32.42. Colombo 38.7 2. Tehran 23.33. South Korea 37.5 3. Colombo 23.24. Johannesburg 25.4 4. Mexico 18.25. Tehran 23.4 5. Bermuda 17.36. Ljubljana 19.0 6. Taiwan 10.87. Bermuda 17.3 7. Thailand 10.78. Taiwan 17.1 8. Ljubljana 10.29. New Zealand 16.7 9. New Zealand 9.810. Thailand 12.9 10. Kuala Lumpur 2.4

When examining the ten last performers, it is not surprisingto find some of the leading markets as they suffered the mostfrom the combined effects of the economic global recession,and the September 11th events. They were also coming offa period of remarkable growth in previous years.


The ten last performers in 2001(In terms of general index performances)

in local currency in USDExchange % Change Exchange % Change1. Euronext -21.0 1. Euronext -25.12. Nasdaq -21.1 2. Stockholm -25.23. Philippine -21.8 3. Athens -27.54. Swiss Exchange -22.1 4. Italy -29.05. Athens -23.5 5. Tokyo -29.96. Italy -25.1 6. Osaka -30.77. Warsaw -26.7 7. Istanbul -32.78. Luxembourg -31.4 8. Luxembourg -35.09. Helsinki -32.4 9. Helsinki -35.910. Malta -34.8 10.Malta -36.9

These two consecutive years of declining share prices havehad a notable impact on exchange activities in terms of mar-ket capitalization, trading, and capital raising.

1. Market capitalization

Federation members total market capitalizationdecreased by an average of 14.5% in US dollar termsin 2001

Federation members’ market capitalization was cut by anaverage of 14.5% in US dollar terms at the end of 2001 atUSD 26,610 bn compared to 31,125 bn at end-2000. Sharetrading value decreased by an average of 24% during thesame period, expressed in USD dollar terms. Around the world,IPOs and new capital raising activities also suffered from themarkets misfortune, as new capital raised by companiesreceded by an average of 62% at the global level to USD342 bn in 2001 compared to 901.4 bn during 2000.

The New York Stock Exchange remained the largest bourse inthe world with a total market capitalization of USD 11,027 bn,representing 41.4% of the Federation total market capitalization at the end of 2001 compared to 37.1% at theend of 2000. With a market value cut by almost a third atUSD 2,739 bn, the Nasdaq Stock Market did succeed in keeping its number 2 position among members.

Like the Nasdaq, Tokyo saw its market capitalization diminish by almost 30% in US dollar terms at USD 2,265 bn.But it maintained its position as number 3 in the ranking

among the Federation exchanges. The Japanese market washotly challenged by the London Stock Exchange, which camejust behind at USD 2,165 bn.

In 2001, the statistical regrouping under the Euronext ban-ner of three bourses, allowed a newcomer to join the groupof the top 10 largest markets : Hong Kong, which is nowafter Tokyo, the second Asian marketplace. Movement inthe ranking positions occupied by several exchanges wasnoted in 2001 : Toronto and Italy gained a position eachand were n° 7 and 8 respectively, while the Swiss Exchangelost some ground from n° 7 in 2000 to n° 9 in 2001.

The 10 biggest stock markets in the world (USD m)by market capitalization in 2001

1. NYSE 11 026 586.52. Nasdaq 2 739 674.73. Tokyo 2 264 527.94. London 2 164 716.25. Euronext 1 843 528.66. Deutsche Börse 1 071 748.77. Toronto 611 492.88. Italy 527 467.39. Swiss Exchange 527 374.6

10. Hong Kong 506 072.9

At the regional level, the North American region, compris-ing the US, Canada, and Mexico represented more than halfof the total market capitalization of Federation memberswith 55% in 2001 compared to 52% in 2000. The part ofEurope in the Federation total market capitalization declinedto 29% in 2001 compared to 31% in 2000. The part of theAsian-Pacific region in the world market capitalization con-tinued to lose ground to 15% in 2001 compared to 16% in2000.

2. Share turnover

Federation members share turnover fell by an averageof 24% in US dollar terms in 2001

The slowdown in the Federation exchanges market value andactivities can also be observed when considering the evolu-tion of the share turnover value in 2001.

At the Federation level, share turnover value dropped by anaverage of 24% in 2001 compared to 2000, expressed in USdollar terms. When turning to the four big time zones, itappears that South American members suffered the mostfrom the global turnover decline. The four bourses belonging to this region saw their share trading valuedecrease by an average 37.8% in 2001 in US dollar terms.The heaviest fall was recorded in Lima (-63%) while theBuenos Aires Stock Exchange registered the less importantone with – 22%.

North American bourses recorded the smallest fall in shareturnover value with a decline of 10.5% in 2001, as expecta-tions about better economic conditions and the terroristattacks made investors cautious.

Europe and Asia-Pacific recorded almost similar declines inturnover value of respectively 22.5% and 25% expressed inUS dollar terms.

3. IPOs and New capital raisingactivities

At the Federation level, members capital raising activitydropped by an average 64% in US dollar terms in 2001

At the Federation level, new capital raised by domestic com-panies in 2001 declined by 62% expressed in US dollar terms.

The economic slowdown that has affected the leading countries and the sharp fall in share prices have not beenfavorable elements for companies to raise fresh capital. Thedecline in private investment, prompted by the weak consumer spending in most of the leading countries, havedissuaded companies to expand their capital. All four regions registered heavy and almost similar reductions of capital raising activity : North American, Asia-Pacific, South American, and European exchanges saw theirnew capital raising activity drop by 67%, 36%, 62.5%, and56.5% respectively in 2001 expressed in US dollar terms.


80

South America*

EuropeNorth America

Asia Pacific

COMPARISON OF MARKET CAPITALIZATION BY TIME ZONE SINCE 1990 - 2001

2001199015.0%

1.1%

28.8%

55.1%

36.7%

0.3%

26.5%

36.5%

* Mexico has been moved to North America


Delegates to the Annual Meeting in front of the Madrid Stock Exchange.

A BRIEF HISTORY OF THEWORLD FEDERATION

OF EXCHANGES

As was true of other multilateral financial organisations, the need

for international co-operation amongst stock exchanges was first felt

in the 1930s. The International Chamber of Commerce, based in Paris,

took the initiative to create an International Bureau of Stock Exchanges,

which existed until World War II.

After the war, it was not until 1957 that the first major steps towards

international co-operation between stock exchanges took place, and

in May of that year representatives of several European bourses met

in Paris. Four years of informal co-operation followed. The partici-

pants then chose to institutionalise this work in the form of FIBV,

the French initials for the International Federation of Stock Exchanges,

launched in London in 1961. The Federation grew constantly.

Today membership encompasses 56 exchanges from all over the world.

Members together account for the vast majority of world stock mar-

ket capitalisation, and most of its exchange-traded futures, options,

listed investment funds, and bonds. There are a further 9 affiliates,

and 35 bourses which are correspondents.

Since its foundation, the Federation has regularly held committee

meetings, general assemblies, and conferences. In recent years, it

has organised committee meetings and specialised workshops for its

members to transfer know-how and to share expertise. As an indus-

try trade organisation, members have discussed virtually every aspect

of the securities business, be it technical, commercial, legal or eco-

nomic. Over the past four decades studies have been published on

such issues as self-regulation, enforcement, trading halts, securities

business conduct, and others.

At the October 2000 General Assembly, members changed the long-

standing FIBV name in favour of World Federation of Exchanges. It is

thought to be simpler. It is also meant to signal the welcome into

the work of the exchange industry both the derivatives markets which

are so intimately associated in the work of members, and the pre-

and post-trade lines of business which are vital fields of business

development.

Home Page: http://www.world-exchanges.org

E-mail: [email protected]

証券取引所Annual Report 2001.pdf

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