The single currency and the European Exchanges

Jörg Franke


The introduction of a single currency in the European Union will have a significant influence on European exchanges in both a material and a formal respect. The extent to which this has an impact will also depend on which of the EU member States join the monetary union.


1. MATERIAL EFFECTS

In a capital market, exchange systems offer a variety of services the interaction of which first makes financing possible through securities or investments in securities. The medium and long-term effects of an EMU will vary, depending on which services an exchange offers. The principal elements to be expected from a European monetary union are:

These elements have an impact on the various market segments:

a) Money and bond markets

b) Stock markets

The monetary union will have less of an impact on the stock markets. However, interest in the blue chips of member States might increase:

c) Derivatives

The same is true with regard to derivatives: futures and options on bonds or money market rates will tend to converge. Derivatives on stocks will be less affected, whereas derivatives on euroindices will become more important.

For market participants, this means:

i) for issuers:

ii) for investors:

iii) for intermediaries:


2. ORGANISATIONAL EFFECTS

The current structure of European exchanges has been shaped by history and does not suit an EMU world. There are over 20 derivatives exchanges and over 25 stock exchanges within the EU. The market is characterised by a variety of market models and trading systems. The market participants are demanding more uniformity and standardisation in trading as well as in clearing and settlements, in order to act more quickly and cheaply in the market.

EMU will also exert strong pressure to dismantle further obstacles impeding a convergence of the markets. Globalisation of the markets will increase if the differences fade away, at least on the money and bond market.

The exchanges will have to provide market participants with decentralised access via networks. A European trading platform with uniform ground rules and a uniform monitoring standard will eventually be introduced - also to halt the advance of off-exchange, private trading systems. The clearing and settlement system could also be harmonised, without this necessarily having to result in a single institution. And finally, uniform accounting rules may also be established on a European-wide basis.

The European exchanges will run into a state of oligopoly competition which forces them even more than before to pursue a strategy that is consistently geared to the needs of the market. As already pointed out, it is not only a matter of facilitating cross-border trading. For cost-related reasons and from the standpoint of risk management, there is also a need to bring together the various market segments, such as the cash and derivatives markets. It would be ideal to integrate clearing and settlement into such a platform.

The costs of such an effort are critical for success. Smaller exchanges could have problems raising the funds they need to make it work. In order to meet these needs while keeping the expense under control, it makes sense to consider working within the framework of cooperation agreements between the exchanges. They can be played in many different ways, and MATIF and DTB are just starting.

30 May 1995


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