Given the Euronext/NYSE merger, Paris now has massive economies of scale to add to its world-renowned expertise in areas including derivatives and risk-based modelling. Arnaud de Bresson explains.

After all the predictions that new technologies would reduce the number of financial centres around the world, real life has sprung a surprise. Rather than a consolidating trend, there are actually more new financial centres and specialised regional centres than ever before, particularly in Brazil, Russia, India and China.

Paris is among the most successful of such centres. Its success rests on a number of factors. Demutualisation of infrastructure, diversification of instruments, globalisation and technology have helped new and specialised financial centres to be more interlinked and to operate as networks. Paris, as a member of the Euronext network, has gained scale and efficiency which make it both a specialised regional market and a significant global player.

Additional growth drivers for Paris have included the arrival of a strong single European currency as well as measures taken by the European Commission to enhance the efficiency and competitiveness of EU financial markets.

The Paris financial centre has also been aided by its openness to international players, a powerful banking industry, efficient market regulation and an innovative environment driven by excellent financial research capabilities and entrepreneurial fund management.

One of the leading European financial centres, Paris enjoys globally recognised expertise in derivatives and quantitative risk-based modelling and attracts many of the largest companies in the world. It offers the world’s largest stock exchange, in terms of capitalisation and value of equity trading, thanks to the merger of Euronext with the New York Stock Exchange, unique expertise in asset management and a deep pool of financial and managerial talent.

Furthermore, Paris’s equity markets have recorded impressive growth for more than a decade. The market capitalisation of the Paris exchange has increased tenfold over the past 10 years, boosted by a record volume of initial public offerings (IPOs), lively M&A activity and a large privatisation programme. The French privatisation programme accounts for more than 45% of the transactions carried out in Europe over the past four years. Steady increases in investment by retail investors and institutional funds with long-term strategies have also contributed to the growth of the Paris equity markets.

Foreign participation has also been significant. For example, overseas investors own 45% of the shares in the large companies comprising the Paris CAC 40 index.

Continental network

As part of Euronext, the first pan-European equity platform, Paris is linked to the equity markets of Amsterdam, Brussels and Lisbon. Since its creation in 2000, Euronext has expanded to include Liffe in London, the leading exchange for euro short-term interest rate derivatives and equity options. In spring 2007, the merger of Euronext with the NYSE created the world’s largest exchange by market capitalisation (€25,000bn), the world’s largest liquidity pool, and one of the world’s premier listing venues, with 80 of the top 100 global listed companies.

This alliance also marks a new era in the consolidation of global financial markets. With NYSE Euronext, stocks are traded 13 hours a day on two continents and corporate issuers and international investors can trade in two key world currencies, the dollar and the euro.

Equity markets are not the only ones giving Paris its edge. The fixed income markets have also grown and have benefited from the euro’s strength. In 2006, international bonds and notes issued in euros totalled the equivalent of $1200bn, compared with the lower value of US issuances of $1000bn.

The euro’s strength is further enhanced by its growing desirability as a reserve currency. While today it accounts for 25% of global foreign currency reserves, that figure is expected to rise to 30% or 40% by 2010.

The French government bond market is one of the most liquid in the world with €920bn in bonds currently outstanding. A wide range of competitive products is available, including 50-year OAT bonds (bonds issued by the government) and inflation-linked OATs.

The French corporate bond market is the largest in Europe, with outstanding bonds totalling €250bn, compared with €180bn in London and €85bn in Frankfurt.

With regards to the more sophisticated areas of finance, Paris is the leading derivatives over-the-counter market worldwide, and the fourth largest derivatives market overall, with recognised expertise not only in equities but also in structured products and commodities. Average daily trading volume is $154bn in fixed-income and foreign-exchange instruments. French investment banks currently account for 25% of the world’s equity derivatives market.

Mathematical talent is not only greatly represented in the equity derivatives area. Paris is a European leader in asset management, with €2500bn under management boasting 14% growth in 2006.

The French asset management industry represents 20% of the European market and the five largest firms now rank among the top 25 asset managers globally, with clients from Anglo-Saxon countries and from new, fast-growing markets in Asia.

Foreign asset management companies operating in Paris now account for 20% of the total by number and hold an 18% share of the market.

The dynamism of French asset management is reflected by its capacity to innovate in both management technique and product design. France plays a leading role in the design and management of guaranteed-capital funds and structured adjusted-risk profile funds, among others. Several investment funds have been launched in Paris, including structured funds, index funds and exchange-traded funds (ETFs), as well as private equity funds and alternative investment funds.

Private equity

Among other drivers of Paris’s financial market is private equity activity. The French capital has a leading position in European private equity with more than €10bn invested in innovative companies in 2006. Overall (in 2006 euros), private equity portfolio companies had combined revenues in France of nearly €200bn, and if foreign revenues are included, their aggregate total was €327bn.

The French insurance sector is also a key force. France is the world’s fourth largest insurance market and it collects 6.5% of all premiums worldwide, behind the US (33.4%), Japan (13.9%) and the UK (8.8%).

Real estate is also booming and investment flows into the French market are increasing rapidly: in 10 years, the amount has jumped from €1bn to more than €23bn today.

Paris also owes its success to its open financial markets. On the equity side, more than 40% of the market capitalisation of the Paris stock exchange is held by international investors. Foreign investors own more than 60% (€540bn) of French government bonds while 20% of French commercial bonds are issued by foreign companies, including companies such as Volkswagen, Metro and GE Capital. About 340 foreign banks operate in Paris as many international corporations do. According to a Fortune Magazine ranking, Paris has the second highest number of international groups headquartered in the city, after Tokyo (see table below).

Finding a balance

Market openness has, however, to be accompanied by effective and efficient regulation which provide trust in the market, investor protection and market robustness. Paris has found the appropriate balance between innovation in the financial markets and appropriate controls.

As the recent subprime crisis has shown, innovative financial instruments must be accompanied by a regulatory environment which promotes stability. The Paris financial marketplace has reinforced its capacity to weather crises, thanks to greater market transparency, better risk monitoring, improvements by rating agencies and better valuation of corporates and products.

Examples of such measures and improvements are found in the implementation of the European Transparency and Prospectus Directives in 2006, by which French listed companies comply with international best practices in corporate governance. All listed companies publish their consolidated statements in line with International Financial Reporting Standards (IFRS).

Risk monitoring has been improved with innovative financial products that take into account the risks arising from securitisation, while scrutiny on rating agencies is facilitated by the French market authority, the AMF, which publishes an annual report on such agencies. According to the 2006 report, nearly 400 debt issuers were rated. The average rating of French issuers translated into medium to low risk and only 7% of issuers were rated as issuers of non-investment grade debt.

Better valuation of complex products is also sought through research programs financed by the Foundation Institute Europlace de Finance (EIF).

A further boost to transparency will be given by the implementation of the Markets in Financial Instruments Directive (MiFID), which will come into force in France this month. MiFID introduces the principle of competition among various trading platforms, providing a broader choice for investors, increased innovation and lower transaction costs.

Paris Europlace

It was the acceleration of international activities and globalisation that prompted financial professionals to create Paris Europlace, at the beginning of the 1990s, with the objective of promoting and modernising the French capital’s financial marketplace.

Paris Europlace has three main key objectives: enhancing international attractiveness; encouraging better regulation to optimise global competitiveness; and developing research and innovation in finance.

Paris’s pool of financial research talent is globally renowned. Areas of expertise include asset evaluation, risk management and mathematical modelling of financial, structural and regulatory factors. Paris alone has some 100 academic institutions that employ nearly 1000 researchers.

To further develop such academic talent, Paris Europlace launched an initiative to boost financial research in France and in Europe with the creation of the EIF.

Since its establishment in 2003, the EIF has sponsored financial research programmes, funded research chairs, organised international scientific and job-market forums and set up databases and information systems about research in finance.

Another major initiative by Paris Europlace is the creation of a financial services cluster, called Finance Innovation, which focuses on technology and innovation and gathers market professionals, academics, universities and research centres.

The cluster’s goal is to draw upon the strengths of Paris’s financial marketplace in order to create new high value-added industrial and research projects and increase the market share of the French financial industry.

It focuses on five strategic objectives: establishing a European financial information platform; facilitating the development of financial start-ups, including putting in place a dedicated financing structure; promoting financial innovation and research, in fields such as climate index and risk hedging; developing international financial education; expanding the link between finance and social innovation and, lastly, putting in place research partnerships on topics such as socially responsible investment and sustainable finance.

To achieve these aims, Paris’s financial services cluster will focus on projects that bring the academic and financial fields together in all segments of the financial industry: banking, insurance, asset management and services for financial institutions.

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