Macedonian Stock Exchange Conference, Ohrid 3/2007 Stock Exchange Integration: Why? And Why Now? Ruben Lee Oxford Finance Group Copyright © Ruben Lee 2007

Stock Exchange Integration: Why? And Why Now? Overview 1) Basics 2) Recent Developments 3) Regulatory Factors 4) Conclusions

Stock Exchange Integration: Why? And Why Now? 1) Basics

Basics Potential Functions to Integrate  Listing  Information Dissemination  Order Routing  Trading  Central Counter-Party Clearing  Settlement  Marketing

Basics Different Contractual Procedures Possible  Linkage  Joint Venture  One Exchange Purchases from Other Exchange  Third-Party Provision  Alternative Business Relationships  Share-Holdings  Mergers

Basics Potential Benefits  Economies of Scale  Easier Access to More Markets  Greater Liquidity by Pooling Order Flow  Greater Visibility  Lower User Costs: Technology Standards Regulation

Basics Most Linkages Have Failed  Over-Optimistic IT Assumptions – Cost & Speed  Exchange Governance Implications  Lack of Credibility of Contractual Commitments  Cross-Jurisdictional Legal Issues  Still Relatively Small

Basics Mergers & Acquisitions: Difficulties of Agreement & Implementation  Technological  Commercial  Legal  Regulatory  Political  Cultural

Basics M&A: Advantages over Linkages  Distribution of Gains not likely to Lead to Conflict  Credibility of Implicit Contract Commitments  Contracts do not have to be Comprehensive

Basics M&A: Lessons  Anticipated Technological Efficiencies take Time  Regulatory Efficiencies Difficult to Achieve  Retention of National Identities Possible  Politics of Mergers Critical

Stock Exchange Integration: Why? And Why Now? 2) Recent Developments

Recent Developments Recent European Past  3 Large Exchanges: Deutsche Börse, Euronext, LSE  Perceived Competition  Instability of Troika  Other National Silos  NOREX seen as a Model for Regionalization

Recent Developments Reasons for Euronext-NYSE Proposed Merger  Euronext: LSE Competition  Euronext: Deutsche Börse Strategy  Euronext: Far Away means Here to Stay  NYSE: Domestic Growth Limited  NYSE: Escape Sarbanes-Oxley  NYSE: Diversification – Derivatives & LIFFE

Recent Developments London Stock Exchange  6 Bids: Deutsche Börse, OMX, Deutsche Börse, Euronext, Macquarie Bank, Nasdaq  Success of London Independent of Success of LSE  Investment Banks’ Second Thoughts  Shareholder Determined

Recent Developments Emerging Markets  Creation of Many Small National Markets  Many are Facing Difficulties  Regional Solutions believed to Offer Hope  Many Failed Attempts at Regional Integration

Recent Developments Others  ASX/SFE  NYSE/TSE - Linkage  NYSE/NSE – Shareholding Purchase  CBOT – ICE/CBOT?  JADE

Stock Exchange Integration: Why? And Why Now? 3) Regulatory Factors

Regulatory Factors France: Informal Regulatory Conditions for Euronext Merger  Federal Governance Structure to Remain  French Marketplace to Continue  Continued Jurisdiction of AMF

Regulatory Factors US: SEC Fact Sheet on Cross-Border Exchange Mergers  Many Integration Forms: No Mandatory Registration  No Mandatory Registration Non-US listed Companies  No Automatic US Regulation with Joint Ownership  US Registration Exchange/Listed Cos. needs analysis  Non-US Exchange under US laws Only if Operating in US  SEC Continued Global Collaboration

Regulatory Factors UK Government’s Response  Safeguard Light Touch & Proportionate Regime  Power to Veto Disproportionate Exchange Rules  Outlaw Rules Endangering London’s Regulatory Success  Overseas Ownership of Exchanges Still Possible

Stock Exchange Integration: Why? And Why Now? 4) Conclusions

Stock Exchange Integration: Why? And Why Now? Conclusions  Potential Benefits of Integration are Large  Cooperative Projects Can Work  But Most Don’t  Mergers More Difficult – but More Likely to Succeed  Legislative/Regulatory Protectionism  Politics is Inescapable