Bringing together the fragments of national securities and derivatives exchanges to form a single, cohesive structure has always been pan-European exchange Euronext's biggest challenge. It remains so today, and the exchange has made considerable progress integrating its handful of markets, which include London, Lisbon, Paris, Amsterdam, and Brussels. Since 2004 the exchange has also quietly focused on building up its structured products segment, and it is its rapid success in expanding, integrating and cementing this part of its business that makes Euronext this year's European exchange of the year.
"Some years ago we launched a warrants market, which was doing well and had seen increasing volumes, but it was more or less stagnating. In 2004 we decided, based on analysis that we had done and discussions with our clients - issuers, but also retail brokers - that there was huge potential in the securitised listed structured product business," says Marianne Demarchi, Paris-based director of business development, strategy and products. "We decided to put the focus on developing these markets, and we put forward a major development plan to increase the market."
The development plan consisted of diversifying the exchange's product range, embarking on a big marketing drive to create interest in structured products trading among users, and focusing on improving trading technology to accommodate the planned new expansion in trading and products. At this stage, Euronext offered plain vanilla warrants, some knock-out products and some certificates, but the market was still fragmented and immature. It was also at this stage that the exchange created the position of head of structured products, hiring Alicia Suminski, who had been a derivatives broker for many years, for its Paris office. From this point on, the structured products segment expanded rapidly.
The objective over the next two years was to double the number of listed products considered more exotic than plain vanilla warrants. Euronext has certainly achieved this goal, with on average over 150% more knock-out products listed in 2006 than at the end of 2004 - there are now 1,175 knock-outs listed.
Meanwhile, the exchange now lists 6,459 plain vanilla warrants, which is a 31% increase on December 2004, and 804 certificates, up 104% in two years. For the warrants and certificates segment as a whole, the average daily number of transactions since the beginning of the year has risen sharply, up 67% from 18,246 transactions in 2005 to 30,419 since the start of the year. Meanwhile, the past year has also witnessed the launch of several new types of instruments ranging from short-term, high-leverage investments to open-ended performance tracking products.
"The growth we've seen on the knock-out products is a sign that things are really evolving, because they are highly speculative products," Suminski says. "They are more complex to understand but offer a diversity of investment strategies to the investor. With that in mind, they still have a lot of potential in all our markets."
The exchange's product issuers agree. "Every day we are getting lots of calls from clients that have heard about these knock-out products, and this is more than two years after we issued our first ones. They say they have heard about them, and they go for it," says Frankfurt-based Dominique Bohler, in charge of co-ordinating the retail, French and Swiss markets at Dresdner Bank. "There's still a lot of potential in these products, and also in the more complicated structured certificates. We have the feeling that (Euronext) is committed to this field and they share the common goal of enlarging this market."
The exchange has also taken advantage of interest in commodity trading by listing knock-outs, plain vanilla warrants and index certificates on a range of soft and hard underlyings, from palladium to agricultural products.
In addition, the introduction of the European Union Prospectus Directive and its single passport rule for retail structured products has simplified cross-border sales and hence made life easier for Euronext.
WHY EURONEXT WON
Euronext has become the European hub for listed knock-out products. The exchange continues to invest in its structured products business, while the EU Prospectus Directive will no doubt further boost its cross-border business.