The 8th Mexican Annual Securities Market Convention, Mexico City, November 1997
Introduction
Mr Chairman, distinguished guests, ladies and gentlemen. It is an honour and pleasure to return to Mexico, a country and a city that I have visited many times, and to participate in this very distinguished conference.
I have been invited to speak on financial market reform in the Netherlands, with a special emphasis on important recent changes in our securities markets, and in the establishment of a company called "Amsterdam Exchanges". I would like to warn you that what may function in the Netherlands, may not necessarily function at all - or as well - elsewhere. No prescriptions will flow from my lips, but only an explanation about the why and the how of the decisions that we took. I leave it to my audience to appreciate whether what works a few feet below sea level can also work at this much more exalted altitude.
Comparisons
Mexico and the Netherlands are countries that are in many ways difficult to compare, but both have very large neighbours - yours even larger than ours - and both recognize that the international context is important to their freedom to set their own policies. Two illustrations: 40 percent of all our exports go to Germany. On the list of US institutional portfolio investments, the Netherlands ranks second only after the UK, but before markets like Canada and Mexico.
History
The Netherlands traditionally has had an extremely open economy as a natural result of our geographic position between France, Germany and the United Kingdom at the confluence of various European rivers. I will not yield to the temptation to quote many descriptions by other of the Netherlands economy although recently the Dutch "polder" - or consensus - model seems to have acquired a rather prominent stature in the press.
Historic scholars - from Diderot and Descartes in their times to Simon Schama today - have written extensively on the Dutch experience. Common to them all of course was the fascination with what we and they still call our "Golden Age" as we call the 17th Century for which Schama rightly or wrongly coined the term "The Embarrassment Of Riches".
It was then - 1602 - that the first tradable shares were issued by the United East Indies Company, that stock trading developed and the securities business was organized. As early as 1688, a detailed description of the functioning of the Amsterdam Stock Exchange was published from which I will give you but one quote: "Shareholder: I really must say that you are an ignorant person, friend, if you know nothing of this enigmatic business which is at once the fairest and most deceitful in Europe, the noblest and most infamous in the world, the finest and most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; it is touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster." - Joseph de la Vega, Confusion de Confusiones
The book from which I took these elegant Spanish lines teaches us that many of the problems common to the securities market today and many phenomena that we consider modern and of the last few decades, have already been described in often minute detail by De La Vega. Some of our solutions may be technology driven, others - for all our pride in being thoroughly modern - do not differ in essence from 17th century approaches. Another Spanish author comes to mind here: George Santyana, with his reminder that those who are unable to remember history are doomed to repeat it.
The Present Day
I now will skip some centuries and come to the beginning of this century when the first Dutch legislation on the securities business saw the light - a law that was modernised only towards the end of the 1980s. In 1989 a securities board was set up to supervise financial markets on behalf of the government, and requirements were formalised to recognise regulated exchanges and admit traders and advisers upon fulfilment of specific quality conditions. In the mid-1990s, the European Union issued its Investment Services and Capital Adequacy Directives (ISD and CAD), after successful earlier efforts to liberalize the banking and, to some extent the insurance businesses across the EU.
These directives prescribed freedom of trade and of establishment in these important financial areas in all the countries of the European Union, plus Switzerland and Norway. Earlier directives had already been promulgated on various securities issues, such as prospectus and information requirements. Further liberalising steps are under active consideration in the WTO-negotiations.
The Investment Services Directive providing for a European passport for securities intermediaries is crucially important, but should be seen against the background of the inescapable advent of technology, the diversification of portfolios by institutional investors, and the broadening of the financial scope by listed companies. The ISD is a major step forward, but only one step in the context of ongoing European and global developments.
A recent study by the Basle-based Bank for International Settlements noted on the subject of the introduction of the euro the following:
The three top banks in the Netherlands (ABN-AMRO, RABO and ING), like our large international companies, hardly need introduction. All have major international investments and involvement in many areas, from trade and agriculture financing to emerging market trading. My reason for dwelling on the Dutch intermediaries and their international activities is not to advertise them; they do that so much better themselves. Instead, it is to highlight their global outlook and to indicate that they, like other major banks and securities houses, view our Dutch financial market as only one of many; they have a choice where to go.
Exchanges and other regulators of the financial markets have to take this outward-looking attitude and tradition into account.
For instance the DNB (the central bank of the Netherlands), which is the main banking regulator, has always been open on a non-discretionary basis to foreign banks establishing in the Netherlands. It has long been an active player in the Bank for International Settlements and other international fora, cooperating with banking regulators from other and larger countries to draw up international regulations that assure that commerce can flow smoothly and safely.
Our tax authorities have also taken care to establish taxation policies that give due regard to Holland as a centre for finance vehicles.
The Securities Board of the Netherlands implemented the ISD with alacrity and established exchange of information memoranda with other securities regulators to arrange appropriate facilities for European financial institutions provided with a European passport.
All this, of course, has had a major impact on the stock exchange, or, as we now call ourselves, Amsterdam Exchanges. Without pretence of completeness some of the more important steps may be outlined.
The Exchanges work continuously to establish and maintain their reputation for well regulated quality markets, by seeking government regulations, or, when private regulation is more efficient, faster, or more appropriate, by drawing up our own rules and regulations. Being active in maintaining our good name has meant we have not hesitated to act before the government - we drew up a model code on insider trading that the government later enshrined in legal regulations - or go beyond its dictates - with rules on market manipulation that are much broader than the fairly narrow government definition.
The ATM
In 1993 we set up a new Amsterdam Treasury Market for dealing in government securities; it now includes 22 electronically linked remote members from many countries. The underlying rationale for attracting remote members is simply that we cannot expect all intermediaries to set up shop in Amsterdam, but we need their business to retain or regain our central international market in Dutch government bonds. Please note that this was a decision taken three years before the Investment Services Directive established a European passport.
Importantly this decision was taking by the Exchanges when it was still run by members, which shows that our members already recognised and agreed that without more international players Amsterdam would not be able to concentrate a sufficient market share.
The home market concept, reinforced by the remote membership seems to us the inescapable response to the internationalisation of the securities business with the aid of modern technology.
In 1994, a new equity trading system (TSA) was introduced, also with remote member capability, and, of course, with the existing foreign and local members. It is a system with segments and subsystems that can be - and are - adjusted with precision to foreign and national requirements, to the diverse needs of players large and small. It brought a greater degree of transparency which we intend to improve further in 1998 by publishing the depth of the market while increasing also the order-driven character of the trading system.
By and large both new systems were a big success, delivering deeper liquidity and tighter spreads. We managed to regain Amsterdam's position as the preferred international market in Dutch securities that we were on the verge of losing. Our market capitalisation now exceeds the GNP of the Netherlands. The Amsterdam market is the 10th in the world. The equity derivatives market is the largest in Europe.
You may be aware that the US-SEC put out for discussion a concept-release document which includes important paragraphs about foreign access to the US-securities markets and its investors. Traditionally the SEC has taken a rather protective attitude. The FIBV (International Federation of Stock Exchanges) chaired by Manuel Robleda has forcefully argued for an approach based on mutual recognition.
But all this may not be enough. Today's markets require flexibility, quick adjustment, speed of decision-making, a businesslike approach, an integrated supply of services, and, finally, decisions based on overall market interest and not only the interests of certain intermediaries who happen to be the owners of the Exchange. The choice on the circumstances is either to leave it to the government or to do it yourself. From De la Vega's time onwards we have known that governments are not especially good in running enterprises or markets. Yes, they should signal in broad strokes the main guidelines and rules, requiring quality and imposing penalties when necessary. But they should not own and run markets.
COMPOSITION OF AMSTERDAM EXCHANGES
- AEX-Effectenbeurs
- AEX-Optiebeurs
- AEX-Clearing & Depository
- AEX-Agrarische Termijnmarkt
- AEX-Information Technology
- AEX-Data Services
In the course of 1996 a number of major decisions were taken, fairly rapidly. The Stock Exchange, the Options and Futures market, the Central Securities Depository, both Clearing Houses and IT departments, as well as the data-vending company were merged into the Amsterdam Exchanges: one integrated company to provide integrated securities business services to all markets players. At the same time a decision was taken to demutualise the existing associations of intermediaries, in both cash and derivative markets. That is, the members voluntarily gave up their say and power in the market organization. This is a rare thing to do. As the Financial Times reminded us:
"As a result of these competing constituencies both the New York Stock Exchange and NASDAQ have seldom been pro-active in making significant changes in their systems."
Amsterdam Exchanges was given a capital of Dfl. 100 mln (equivalent to US$50 million); all other funds of the two broker associations will be returned to their members. Amsterdam Exchanges was set up as a company with shareholders and a supervisory board (a collection of 'the great and the good', not representatives of shareholders or intermediaries), which nominates management and functions as a sounding board for it, and which under the Dutch Corporate Law renews itself.
The shareholders are the former intermediaries with 50% institutional investors (investment companies, unit trusts, pension funds and insurance companies) and listed companies own the other half. The shares pay a preferred dividend of 7%. Other profits are paid to former member firms via profit-certificates. In 2002 preferred shares and profit-certificates merge into ordinary shares.
There are no restrictions on nationality and a maximum of 10% of the registered shares may be concentrated in one hand. The shares are tradeable within the groups. The shares which are issued at 1,000 guilders nominal and sold at 3,100 are now trading at about 4,000 - apparently the market appreciates the steps we have taken. Shares will be fully tradeable after listing in 2002, when Amsterdam Exchanges commemorates 400 years of existence. The only limit then will be a 10% voting maximum. We have not yet decided at which exchange to list our own shares, but it will certainly not be only on our own.
Although it is far too early to draw conclusions, a number of results may be noted: the Amsterdam Exchanges functions like a company, taking into account all the interests of market participants, catering not only to intermediaries but also to listed companies, institutional and private investors, and others, such as financial analysts, external auditors, tax and legal advisers.
Yes, we have a profit motive. This year we expect to more than double our pre-tax profits.
The former intermediaries are important clients, so we listen quite carefully to them - but they do not dictate policy. If we at the Exchanges make the wrong decisions we will get punished, not by the members but by the markets. There is no monopoly, de juro or de facto, so intermediaries and others are free to take their business elsewhere. In order to involve all market participants in the company, a number of advisory groups have been set up or confirmed, so their voices can be heard on company policy before decisions are taken. The company now actively solicits its clients: quite visably we pursue potential listed companies whose numbers rise steadily and stand now at 500, half of which of foreign origin.
BENELUX
(BRUSSELS/LUXEMBOURG/AMSTERDAM)
- Cross Exchange Membership
- Benelux Data Feed
- Common policies
Early decisions have been taken in a number of areas.
One is to cooperate more closely with Benelux exchanges to arrange for a common securities market through full cross-exchange membership, a common data feed, and other policies. Another is to join Euro.NM, which creates a European growth company market, consisting of Deutsche Bourse, the Paris and Brussels bourses, and ourselves.
EURO.NM
- Nouveau Marche - Paris
- Neuer Markt - Frankfurt
- Nieuwe markt - Brussels
- NMAX - Amsterdam
- Euro.NM Datafeed
- Cross Market marketing
- Common marketing policy
- Harmonisation of rules
To cater for the entire securities trading and processing, Amsterdam Exchanges offers in house both primary and secondary markets, both cash and derivatives markets, as well as clearing and settlement services, and data-vending. The company is capable of integrating the cash and derivatives markets, among other making sure that the derivative tail doesn't wag the cash dog.
This year we will modernise the cash clearing by introducing a margining system instead of a guarantee fund and allowing access only to clearing members. The system provides even today a choice between trade for trade and netting based clearing.
Next year we hope to integrate the margining system of both cash and derivatives clearing, which may well be a global first.
NEW PRODUCTS AEX
- $ - HFL Contract
- $ - Euro contract as of January 1 1999
- FTSE-Eurotop 100 index, options and futures traded on them
We have introduced new products aimed at the European Euro market, such as dollar-guilder contracts - which will automatically evolve into euro-dollar contracts - listed at the Exchange. We cooperate with FTSE in London in the introduction of the FTSE Eurotop-100 and -300 indices, plus appropriate foreign licensing.
The Euro
Finally, the arrival of the euro - referred to above - will bring a much more integrated European market, with services all across Europe in one currency. As a company we need to be ready for the euro in 1999: we will introduce the euro in all markets on January 4, 1999. We need to be and will be ready for the millennium bug in the year 2000. If not ready, we will be out of business. The market gives and the market takes away. Its rewards are substantial, its punishment severe and far more stringent that any regulatory or government incentive.
Conclusions
I conclude: globalization, technology development and regulatory harmonisation, the latter at least partially driven by market forces, coupled by the international outlook of Dutch and other intermediaries, investors and companies, compel Stock Exchanges to contemplate change.
Contemplation is needed but not enough. Fast decisions are required, playing into the needs of the markets that change at sometimes dizzying speed.
In our view only a company that itself is exposed to the vagaries of the market, that recognises and challenges competition, is open to co-operation, can adequately cope.
As I said, Amsterdam Exchanges was set up as a company, not any longer caught in the conflicting interests of its owners. It is being run also as a company, bringing with it a changed attitude of management and of staff and a client oriented outlook.
So far, the reactions of the markets have been positive with even more players joining the rapidly increasing levels of activity.
As De la Vega wrote:
"This, my friends is all that I have to say about the [late] misfortunes on the stock exchange, although my presentation gives only a pale picture of events."
Paul Arlman, Amsterdam/Mexico City, November 1997
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Paul Arlman, Amsterdam Exchanges AEX Amsterdam: 00 31 20 550 4004 or Paddy Manning, St James Corporate Communications London: 44 171 436 4101.
