Economies of scale and cross-border network effects are two key characteristics of the cross-border exchange business model and the value creation in the sector. Hence, the Euronext Group has consistently concentrated its efforts on the following objectives since its inception:

• increasing customer value by reducing trading costs, improving the efficiency and security of the markets, as well as boosting Liquidity by raising the number of market participants and attracting international flows of capital;
• increasing shareholder value by improving the business’s profitability; and
• reinforcing the weight of the Group in exchange industry, its network and global performance by leading the consolidation of Europe’s financial markets.

Euronext has been entirely focused on developing its core businesses along these objectives, both organically and through external growth, and has divested from unrelated businesses, including Clearing and Settlement. It has created value by introducing innovations aimed at matching client’s requests and evolving needs. The cross-border consolidation, which has been the cornerstone of the Group since its creation five years ago, is a perfect illustration of that strategy, and its track record is outstanding both in terms of users benefits and market efficiency, as well as in terms of shareholder value. Meeting clients evolving needs is also achieved by new business initiatives and organic developments, such as the recent launch of Euronext’s new wholesale services for Equity Derivatives (Afirm, Bclear and Cscreen), which help to simplify and automate many of the manual processes that are currently common in the OTC transactions.

In 2005, Euronext continued to pursue the same successful four-pronged strategy of consolidation and related-integration, harmonisation and diversification as in previous years.

Consolidation and integration

Euronext has successfully initiated the first steps of the consolidation of the highly fragmented financial market infrastructure in Europe. It has fully integrated five derivatives exchanges and four securities exchanges together, and has triggered the consolidation of clearing and settlement services by contributing its clearing house to create LCH.Clearnet, the largest independent CCP in Europe, and by selling most of its settlement and depository activities to Euroclear. These steps are by far the largest moves towards the reduction of market fragmentation in Europe and the realisation of the so-called horizontal model, granting independence between trading, clearing and settlement organisations.

The first stage of integration initially focused on the Group’s trading platforms, which allowed it to fully combine initially separated exchanges, reduce operating costs by using single trading platforms, and optimise the efficiency of these markets. The organisation’s structure was also streamlined to create a cross-border, business-oriented organisation that minimises costs and redundancies, and focuses on customers. The integration generated a continuous decrease in costs (excluding GL TRADE), notably IT costs. That was again confirmed in 2005, the year in which the full benefits of the four-year migration plan could be clearly seen. The implementation of single trading platforms (cash and derivatives) helped drive increases in trading Volumes and improved the efficiency of markets (narrower Bid-Ask Spreads and enhanced Liquidity).

2005 saw the start of a new phase of rationalisation, still aimed at streamlining the Group’s cost base. Euronext built on its experience in managing IT activities when it transferred its internal IT services provided by LIFFE Market Solutions to AtosEuronext, thus creating Atos Euronext Market Solutions. This step will enable the Group not only to achieve further reductions in its IT expenses, but also to benefit from the best possible standard of service and from future IT developments to help it meet its users’ needs.

Harmonisation

Harmonisation has been a key part of the integration process, resulting in simplified access, listing and trading on Euronext’s markets. Building on the adoption by the Euronext markets of common IT platforms for trading and clearing, the introduction and development of a harmonised Rulebook and a simplified membership structure has allowed market participants to easily access what has become a single, integrated cross border market in securities and derivatives. The development of these harmonised arrangements has been achieved with the cooperation and support of the regulatory authorities in the five Euronext jurisdictions, who work together to discuss and approve each stage of harmonisation. The net result of these developments is the implementation of an innovative market model which allows members and issuers access to all Euronext markets, not just their original entry point. In 2005, further progress was achieved in terms of harmonisation. First, Euronext harmonised its listing structure by launching Eurolist, a single list for all the Euronext markets, simplifying and enhancing the visibility of the issuers. Secondly, on the Derivative Markets, the harmonisation of all Equity Option contract sizes in response to customer demand contributed to the strong year-on-year performance. Finally, further harmonisation in both cash and derivatives trading fee structure was implemented.

Diversification of activities and expansion

Euronext’s policy of diversification is based on enriching its offering by adding new products and services to its offer on one hand, and expanding its customer base through international expansion on the other. The Group also continued to diversify its revenue base in order to mitigate the impact of adverse fluctuations in revenues from existing sources and bearish market trends.

In 2005, Euronext significantly reinforced its position in fixed income products by taking, in partnership with Borsa Italiana, a major stake in MTS, the largest electronic platform for debt instruments in Europe. This opens new opportunities to expand our offerings in related asset classes, both for cash and derivative products.

Euronext continued to introduce initiatives to promote SMEs, meet their needs and provide them with new ways of raising capital and financing their growth. In connection with this, it introduced Alternext, a new exchange regulated market segment for SMEs. A third of all listings on Euronext’s markets in 2005 were on Alternext, and the new market’s success is expected to continue in 2006, with the roll out of Alternext in all jurisdictions. Euronext has initiated a project to attract international listings both on Eurolist and on Alternext. The attractiveness of the European market has increased for international issuers, and Euronext can offer the access to the largest Pool of Liquidity in the urozone.

Euronext.liffe undertook another key initiative with the launch of its new wholesale services for Equity Derivatives (Afirm, Bclear, Cscreen). These services provide users with Straight-Through Processing for wholesale equity transactions. That is a secured, automated, flexible, cost efficient service which reduces the counter-party credit, legal, and operational risks associated with OTC trading. In addition, Euronext.liffe is investing in improving its central market for Equity Options by rolling out its successful

Amsterdam market model to other Euronext markets. Brussels adopted this market model in January 2006, with immediate success. In the second half of this year, London and Paris will adopt the model.

Alongside this, the Group continued to expand its international base. In 2005, new initiatives were undertaken in connection with various policies pursued by Euronext since its creation. These include:

• a policy of cross-membership and cross-access agreements with other exchanges to enable members to trade securities listed on other markets. These agreements do not involve capital transactions. Agreements are in place with the Swiss exchange (SWX), under which five Swiss members have been active on the Paris securities markets since March 1999, and with the Luxembourg exchange (BdL), giving the Luxembourg exchange members access to Euronext’s markets in Amsterdam, Brussels and Paris since November 2000, and subsequently Lisbon;
• a policy of obtaining regulatory approval for locating trading screens and/or marketing products in major non-European jurisdictions in order to facilitate the international distribution of Euronext derivative products. This includes no-action letters that permit direct access to trading from the US on the Derivative Markets operated by LIFFE Administration and Management and at Euronext.liffe’s marketplace in Paris with respect to futures and options contracts that fall under the sole jurisdiction of the CFTC.

Euronext.liffe took a further step towards greater international distribution by launching its first hub in Asia, in Singapore, in October 2005. Further hubs are planned, to extend the reach of LIFFE CONNECT®, Euronext.liffe’s state-of-the-art electronic trading platform to new customers around the world.

In 2005, Euronext’s integrated and open model continued to prove its efficiency and profitability. It put the Group markets in the position to benefit from the bullish Volumes trend by reaping a record year from both cash and derivatives trading perspective. It also enabled the Group’s EBITA margin to further increase, reinforcing Euronext’s competitive position.