Contents. 38 Annual Report and Accounts 39 Annual Report Annual Accounts Auditor s report 78 Annual Report of the Control Committee

Transcription

1 Annual Report 2006

2 Contents 3 Oslo Børs 4 Main events in Key figures 6 President and CEO Bente Landsnes: A proactive and adaptable exchange 8 Oslo Axess new marketplace for shares from May The activities of Oslo Børs 11 How the securities market functions 12 Strategy of Oslo Børs 18 Further information on operating revenues and operating costs 21 Financial Ratios 25 Shareholder information 27 Board of directors statement of policy on corporate governance 35 Board of Directors of Oslo Børs ASA 36 Senior Management, Corporate Bodies 37 Organisational structure of Oslo Børs 38 Annual Report and Accounts 39 Annual Report Annual Accounts Auditor s report 78 Annual Report of the Control Committee 79 Articles of Association of Oslo Børs Holding ASA

3 Oslo Børs dates back to the opening of the first exchange in Norway in 1819, and it operates the only regulated marketplaces for securities trading in Norway. Oslo Børs provides marketplaces for listing and trading of Norwegian securities. The exchange offers trading in shares, primary capital certificates, fixed-income securities and derivatives. Oslo Børs carries out extensive quality assurance of the marketplace through surveillance and supervision of trading and market participants. OSLO BØRS Oslo Børs is a member of the NOREX alliance, which includes all the Nordic and Baltic stock exchanges. Collaboration between the members of the alliance principally involves the use of the same trading system and a harmonised rulebook. Oslo Børs is wholly owned by Oslo Børs Holding ASA. Oslo Børs Holding ASA is listed on the OTC list, which is owned 50/50 by the Norwegian Securities Dealers Association and Oslo Børs. The market capitalisation of Oslo Børs Holding at the close of 2006 was NOK million.

4 Main events in January Oslo Børs launches extended trading hours for the equity and derivatives markets. 3 April Oslo Børs, Iceland Stock Exchange and the OMX exchanges in Stockholm, Copenhagen and Helsinki launched a new Nordic index family known as VINX. 21 April Oslo Børs makes important changes to the OBX index. The major changes are a 1:4 split and making OBX a true yield index. 22 June The Alternative Bond Market (ABM) adds the 100th bond issue since it was established one year previously. 35% of all new fixed income issues over the last 12 months are listed on the ABM. 1 June Spring 2006 saw a sharp increase in activity in the derivatives market. The number of derivatives contracts traded in May is 62% higher than the previous record for one month's trading. 14 July Oslo Børs announces the conclusions of a comprehensive strategic review carried out in spring July Oslo Børs signs an agreement with the Norwegian Securities Dealers Association to acquire 50% of Fondsmeglernes Informasjonstjeneste AS (FINFO). FINFO operates and manages the system for OTC trading in Norway. 11 September Oslo Børs announces that it intends to establish a new authorised marketplace for shares. Oslo Axess will be launched in May December Statoil and Hydro announce a proposal to merge their respective oil and gas activities. 31 December 2006 proves to be another recordbreaking year for Oslo Børs, with new records in all areas. The average daily value of trading in shares and primary certificates reaches NOK 10.3 billion, up by 70% from the record set in The Benchmark Index gains 32.4% in 2006, and all the sector indices show an increase for the year. 4

5 Key figures Financial key figures Norwegian GAAP (as published) IFRS (restated) IFRS IFRS Operating revenues Operating profit Profit for the year Earnings per share (NOK) Change in cash per share (NOK) Change in cash per share before dividends (NOK) Ordinary dividend per share (NOK) Extraordinary dividend per share (NOK) Return on equity 17.6 % 28.4 % 50.9 % 36.9 % 57.6 % 67.2 % Return on total capital 18.8 % 26.3 % 35.2 % 36.2 % 52.6 % 58.7 % Net operating margin 23.6 % 30.2 % 36.9 % 37.5 % 51.8 % 59.3 % No. of employees Definitions: Earnings per share Proft for the year/number of shares Change in cash per share Change in cash/number of shares Change in cash per share before dividends Change in cash before paid out dividends/number of shares Return on equity Profit for the year /average book value of equity at the beginning and the end of the year Return on total capital Pre-tax profit/average book value of assets at the beginning an the end of the year Net operating margin Operating profit/operating revenues IFRS International Financial Reporting Standards IFRS (restated) IFRS IFRS (NOK 1000) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenues Operating expenses Salary and other personnel expenses Other operating expenses Operating expenses before depreciation Depreciation Total operating expenses Operating profit Net financial items Ordinary pre-tax profit Tax Earnings for the period Earnings per share (NOK) Operational key figures Equities No. of companies listed Market cap. issuers at (NOK bn) New issues for cash (NOK bn) Turnover by value (NOK bn) Percentage change from prior year % 24.3 % 64.3 % 66.8 % 70.9 % Average daily turnover (NOK bn) No. of transactions (1000) Average number of transactions per day Percentage increase in number of transactions % 14.6 % 43.3 % 60.9 % 62.7 % OSEBX Percentage change in benchmark index - OSEBX % 48.4 % 38.4 % 40.5 % 32.4 % Bonds No. of bonds listed No. of bonds on Alternative Bond Market Turnover by value - ex repo (NOK bn) Repo turnover by value (NOK bn) Market cap. at (NOK bn) Derivatives No. of contracts traded Turnover by value options (NOK bn) Turnover by value indexfutures (NOK bn) Turnover by value forwards (NOK bn)

6 A proactive and adaptable exchange Recent years have seen increasing competition between stock exchanges around the world. Oslo Børs has very clearly strengthened its position. We are a compact and proactive organisation, well used to managing change, and committed to meeting our customer's needs. Competition between stock exchanges is set to intensify in the years ahead. We see significant opportunities for the Norwegian market to grow and develop, and we have developed a strategy to make best use of these opportunities. Greater competition makes it even more important that we remain on the offensive, particularly when it comes to maintaining our position as a preferred marketplace for issuers and members both in Norway and internationally. Oslo Børs has attracted a strong increase in the numbers of issuers and member firms over recent years. However, this growth will only continue if we ensure that the right factors for success are in place. Perhaps the most important of these is to maintain a close dialogue with our customers, to listen carefully and understand their requirements and the challenges they face. We will make sure that we are well equipped to develop high quality projects, based on indepth understanding of what matters to both current and potential customers. Oslo Børs is well positioned in a number of attractive market segments. Over the next few years, we aim to build on this strong foundation and continue to develop the significant international position we already hold. We have elected to do this as an independent exchange, and the rationale for this decision is the greater degree of commercial freedom and flexibility that we enjoy in our own right. We have enjoyed good collaboration with the other Nordic exchanges over recent years through the NOREX alliance, and we intend to continue this collaboration. President and CEO Bente A. Landsnes An important aspect of strengthening our market is the introduction of Oslo Axess, an authorised marketplace that will be launched in May Oslo Axess is principally a marketplace for companies that would like to offer their shares on an authorised marketplace without having to be listed on the stock exchange, while retaining extensive investor protection and regulation through trading surveillance, rules and regulations, etc. It is a challenge for a small exchange to develop and maintain a competitive operating and regulatory environment, but this is an area of high priority for Oslo Børs. The market must perceive the regulation of our market to be just as thorough, secure and efficient as that of our competitors' markets. We carefully monitor international developments, and continuously benchmark our market against regulatory structures and market practice in other countries. Investors have flocked to Oslo Børs over recent years, and never before has there been such strong interest in Norwegian securities. This is, of course, very pleasing, and we intend to work hard to maintain this trend. 6

7 Our objective is to make the Oslo market so attractive that an everincreasing number of Norwegian and foreign investors continue to invest increasing amounts of capital in Norwegian business and industry through the Oslo Børs marketplace. This will ensure that Oslo Børs continues to be an important source of equity capital for listed companies and so helps them to grow and develop. We need to pay attention to a number of areas to achieve this. We have increased the operational capacity of our organisation, and are working to expand our expertise in a number of areas. The Oslo market is particularly strong in several sectors. The energy sector stands out, but Oslo Børs also has a strong international position in the shipping and aquaculture sectors. We intend to develop these areas and make them even stronger. One example of this is the development of a separate reporting regime for the oil and gas reserves reported by oil companies. We are also working to strengthen our expertise by emphasising these requirements when recruiting new staff. We do of course pay close attention to developments in trade and industry, and keep up to date with what is happening in companies in all sectors, but particularly the sectors where the Oslo market has particular strengths. This includes participating in industry seminars and other arrangements that we consider important for our listed companies and for new companies or sectors of potential interest for Oslo Børs. We also arrange regular capital markets days both in Norway and in various international markets. This is done in close collaboration with investment firms and the companies listed on Oslo Børs. These arrangements have been extremely successful, and we intend to expand the scale of our international activities. Changes in the regulatory framework create new challenges for stock exchanges. Two major EU directives due to be implemented in 2007 (MiFID and the Transparency Directive) will lead to greater competition for important aspects of stock exchange activity. Oslo Børs will work hard to maintain its competitive position by being flexible and customer-oriented. It is extremely important in a world where the securities market is exposed to intense competition that the Norwegian securities infrastructure is both efficient and competitive in international terms. Oslo Børs, VPS and VPS Clearing maintain a close and constructive dialogue to help ensure a unified, efficient and competitive securities market for investors and issuers. A more detailed account of the strategy of Oslo Børs can be found at page 12 of the annual report. Bente A. Landsnes, President and Chief Executive Officer of Oslo Børs 7

8 Oslo Axess a new marketplace for shares In May 2007, Oslo Børs will open Oslo Axess, a new alternative for companies that want to list their shares and gain access to the capital market. Oslo Axess is principally aimed at companies with ambitions and growth potential that need an alternative to the normal stock exchange market for listing their shares. For investors, Oslo Axess will be a regulated marketplace that gives them access to companies not normally available in a stock exchange market. This might include newly-established businesses with exciting business ideas, or established companies looking to target further growth that for various reasons do not want to be listed on the normal stock exchange market. Oslo Axess is what is known as an authorised marketplace. This means that the normal duties and responsibilities of issuers set out in legislation and regulations (the duty to disclose information, accounting in accordance with IFRS and the duty to issue prospectuses) will apply in full. This is also the case for the rules affecting investors, such as the prohibition on abuse of insider information, the duty to notify major changes in shareholdings, primary insider notification requirements and mandatory offers. In other words, Oslo Axess is a well-regulated marketplace with high standards and good investor protection. This is entirely in line with the feedback Oslo Børs heard from the market during its work on developing the new marketplace. When a company's shares are listed on Oslo Axess, the company will be subject to the same duties as apply to a listing on the stock exchange market. Oslo Børs will monitor and quality-assure compliance with these duties. The main difference between Oslo Axess and the stock exchange market is that the requirements for admission to Oslo Axess will be somewhat less onerous, principally in terms of the company's time in existence and market capitalisation. The table at the right shows a comparison of the requirements for admission to the Oslo Børs and Oslo Axess marketplaces. Oslo Axess is clearly differentiated from the stock exchange market to ensure that it is readily apparent which companies are listed on Oslo Børs and which are Oslo Axess companies. This includes a separate website for Oslo Axess ( separate indices for the different marketplaces and different logos and visual identity. There is no specific requirement for a company to have carried out its activities before it is admitted to Oslo Axess, but threshold requirements may be applied on the basis of a case-by-case overall evaluation. Companies will in any case be required to have issued at least one annual or interim report. The minimum market capitalisation is NOK 8 million, equivalent to the requirement for admission to the SMB List prior to Spring As part of the introduction of Oslo Axess, the SMB and Main Lists for companies listed on Oslo Børs will amalgamate to a single list. A company listed on Oslo Axess must have at least 25% of its shares held by persons who are not related to the company, the same requirement as for Oslo Børs. At Oslo Axess these shares must be spread among a minimum of 100 shareholders, each holding at least one round lot. The corresponding requirement for Oslo Børs is 500 shareholders, each holding at least one round lot. The procedures for applying to be listed on Oslo Axess are similar to the procedures for the stock exchange market. Subsequently, a somewhat simplified application procedure for listing on the stock exchange market will apply to companies that are already listed on Oslo Axess. Decisions on 8

9 admission will be made by the Board of Oslo Børs. Transfers from Oslo Axess to the stock exchange market will be subject to a fixed fee. No fee is charged if a company listed on the stock exchange market wishes to transfer to Oslo Axess. The same fee structure applies to Oslo Axess as the normal stock exchange market, except for the initial listing fee, which is somewhat lower for admission to Oslo Axess. Criteria for admission to listing Term/Segment Oslo Børs Oslo Axess Distribution of shares 25 % 25 % Number of shareholders with a least one round lot Market value (NOK million) History of incorporation and In business and Issued at least one business activities carried out activities annual or interim for at least three report. Length of years. Exemptions time in business may be granted. forms part of the overall evaluation. Pre-commercial companies Not eligible for Case-by-case listing unless evaluation of exceptional suitability for permission is listing. Normal granted. If requirement for permission is liquid assets. granted, stricter liquidity requirements will be imposed. Minimum share price NOK 10 NOK 1 For further information on Oslo Axess, see 9

10 10 The activities of Oslo Børs

11 The securities market how it operates Settlement/ Clearing Investor Investment firms Exchange Investment firms Investor Issuer The functions of the securities market The securities market includes all primary and secondary trading in securities. The main function of the securities market is to provide a link between issuers seeking to raise long-term capital (the primary market) and owners of capital seeking good investment opportunities (the secondary market). Oslo Børs operates the regulated sector of the Norwegian securities market. Access to capital By participating in the securities market companies gain an exposure to a broad universe of investors. This creates opportunities for companies/projects to gain access to financing. Liquidity By issuing securities (the primary market) companies transform realworld investments into liquid financial investments that can be traded in smaller amounts in the secondary market. The liquidity this creates makes it possible for investors to have a short-term involvement without affecting the investments the issuer carries out. Players in the securities market Oslo Børs is the only regulated market in Norway and gives investors the opportunity to buy and sell financial instruments such as shares, bonds and options through investment firms on an exchange. The chart above illustrates the securities chain: Investors initiate purchases or sales of securities by communicating their interest in buying or selling through a broker employed by an investment firm. The broker enters the order in the Oslo Børs electronic trading system on behalf of the investor. Investment firms also give investors the opportunity to route their orders directly into the electronic trading system. However the investment firm remains responsible for these orders, and they are shown in the name of the investment firm. The order is then automatically matched to an equivalent order entered on behalf of some other investor. There are very considerable advantages in concentrating orders to a single order book. It is one of the most important pre-conditions for liquidity in the marketplace, and the benefits of a single order book also include: Fairer treatment of all players since it allows all interested parties to take part in the process of price formation Fairer prices that mean lower risk for investors and a lower cost of capital for issuers Greater transparency, making it easier to detect undesirable behaviour However using a centralised order book also creates some possible disadvantages: The market may receive new information that causes a rapid change in price and the investor is unable to change an order before it is automatically matched Orders registered with the trading system may give other players useful information on the current state of the investor s supply and demand in the security Investors may find they are trading with better-informed counterparties In order to reduce the risk involved in using the order book Oslo Børs actively applies trading rules, trading methodology and supervision tools. The investment firms involved in a trade are also responsible for ensuring that the change in ownership of the shares or bonds is recorded on the share registers operated by VPS (the Norwegian Central Securities Depository) at the time the purchaser pays the seller through the investment firm. Transactions in the derivatives market are cleared through VPS Clearing. This means that VPS Clearing acts as a guarantor between the parties to a transaction. Investment firms also provide services for listed companies and other issuers that have securities listed on Oslo Børs. These firms also fulfil the fundamental function of collecting, analysing and presenting information from issuers to provide the basis for the process of price formation in the market. 11

12 Strategy of Oslo Børs Oslo Børs Holding ASA holds 100% of the share capital of Oslo Børs ASA. Oslo Børs ASA in turn holds 100% of the share capital of Oslo Børs Informasjon AS. These three companies make up the Oslo Børs Holding ASA group. The group s activities are carried out by Oslo Børs ASA and Oslo Børs Informasjon AS. Oslo Børs ASA offers trading in shares, primary capital certificates, fixed income products and derivatives products. In addition, a number of products and services are offered by the Oslo Børs Institute, which is the business area of Oslo Børs involved in training and related services for the securities market. Oslo Børs plays an important role in the primary market for shares and fixed income products, i.e. in connection with the issue of shares, primary capital certificates and bonds. Oslo Børs Informasjon AS processes and distributes market data generated by the Oslo Børs marketplaces. The following commentary refers to the Oslo Børs Holding ASA group. Objectives and values Oslo Børs vision: The future is traded now By its very nature, investing in securities is investing in the future. Issuers of listed securities are forward looking, and have plans and targets for their future development. This is what they offer investors - the opportunity to invest in their vision and future opportunities. In many cases, companies would not be able to develop their corporate vision without access to capital from the stock exchange market. These investments do involve a degree of risk, but in a good marketplace this risk can be balanced by ensuring a good flow of information that is equally available to everyone. Issuers duties and responsibilities towards the stock exchange - monitoring their compliance to rules and regulations, together with information systems that give investors continue access to strategic and financial information, provide the basis of the information needed for investment decisions. This puts investors in a position to evaluate future prospects. Trading information, including the state of the order book and transactions carried out, is continuously available through information services that allow investors to monitor how other investors see the situation. The picture is given greater clarity by the duties that apply to investors to disclose changes in large shareholdings and the rules on mandatory offers. All of these activities take place under the watchful eye of the stock exchange, using specialised systems monitored by a large staff of highly experienced specialists who ensure quality at every stage of the process. A wellregulated and fair marketplace makes it possible to invest in the future now! Corporate values Oslo Børs is committed to upholding consistent and proper corporate values. Our attitudes and actions are built on the following values: Trustworthy This is a core value that demands a high level of professionalism, integrity, loyalty, fairness, responsibility and security. Courageous This value requires continuous renewal, and places particular demands on our ability to be proactive, decisive, open to change, dynamic and innovative. Profitability minded This is an operational value and requires us to be profit-oriented, cost efficient, responsive to the market and committed to value creation. Collaborative This is a relationship value and places particular demands on our commitment to strengthen and develop our network to reinforce the position of Oslo Børs. Objective Through its efficient and qualityassured marketplace, Oslo Børs will help to ensure: access to risk capital for business and industry an effective secondary market This will be achieved through purposeful and value-creating interaction between companies, investors, member firms, business partners, employees and owners. Targets Oslo Børs operates in accordance with the following overall targets: 1. Oslo Børs shall be the leading marketplace in Norway a) Norwegian issuers always turn to Oslo Børs b) Dominant market share for trading in our products c) The preferred source for market data from the Norwegian market 2. Increasing numbers of participants trading through Oslo Børs a) Issuers particularly in the sectors where Oslo Børs is especially strong b) Member firms and investors c) Distributors and end-users of market data 3. Customers and stakeholders to have strong confidence in how Oslo Børs operates the market and its activities, and to see Oslo Børs as a service-minded operation 12

13 9,5 8,5 7,5 6,5 5,5 4,5 3,5 2,5 1,5 0,5 May Sept Jan May Sept Jan May Sept Jan May Sept Owners to be satisfied with their return on investment and with the business of Oslo Børs 5. Business partners to value their collaboration with Oslo Børs 6. Employees to identify with the operation, and enjoy job satisfaction and personal development Critical success factors In common with banks, telecommunications companies and other electronic networks, Oslo Børs creates value on the basis of organising transactions and communications between third parties. Customers are given access to services and business opportunities by setting up and running a network. A stock exchange such as Oslo Børs can seek to manage three crucial factors that help to determine which gateway customers will choose and so determine the competitive position of the network that forms the marketplace: 1. The size and composition of the customer network 2. Customer confidence quality and image 3. Cost efficiency Oslo OMX Frf Lon Nasd Nyse investors considering whether to trade in the Oslo market will look carefully at which companies are listed and how many other investors there are to trade with. Similarly companies considering a listing on Oslo Børs will place very great importance on whether the Oslo market offers sufficient investors with an interest in providing risk capital and trading shares on a continuous basis. The key factors in this are: The number of active investors and their size in terms of funds under management The number of member firms, their competitiveness and the size of their customer base The number of listed companies/ securities and the degree of investor confidence they attract The share of savings that is allocated to the securities market Liquidity indicators: relative spread, volume of turnover etc. It is difficult to quantify many of these factors. One indicator that can be quantified is the growth of trading volume on Oslo Børs relative to other exchanges since the introduction of the Saxess trading system. The chart to the left shows that Oslo Børs has enjoyed a very positive trend by comparison with other exchanges. The growth in trading volumes seen over recent years can be attributed to a number of factors, some of which are interrelated. The listing of Statoil and Telenor created considerable additional trading volume, which also helped to increase investor interest in the Oslo market in general. Recent years have also seen a particularly strong performance from sectors in which Norwegian companies are typically well represented. Trading volume on Oslo Børs has always been dependent on significant involvement by foreign investors. The decision to join the Norex alliance was a deciding factor for foreign investors since it simplified access to Oslo Børs and attracted a number of foreign member firms. Oslo Børs has also put considerable effort into presenting the marketplace for companies considering listing and promoting the Oslo market and its listed companies to investors, both in Norway and internationally. During the course of 2006, Oslo Børs arranged presentations in Norway, Sweden, USA, Germany and Japan to promote the Oslo marketplace. Further presentations are planned for Greater investor confidence in the Oslo market has also played a role in encouraging a higher level of market activity (see the further comments below on Confidence quality and image). The following table shows the number of active members at the close of each of the last five years. The size and composition of a customer network can be important factors in customer choice. In the case of Oslo Børs this means that Active members Local members Remote members Total number of active members

14 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Jul. 02 Jan. 03 Jul. 03 Jan. 04 Jul. 04 Jan. 05 Jul. 05 Jul. 06 Over recent years, Oslo Børs has paid particular attention to the need to maintain investors confidence in the market. As part of this, Oslo Børs has sought to monitor the level of investor confidence in the Oslo market, in the companies listed on the exchange and in the exchange s member firms, as well as assessing which factors are of greatest importance to investor confidence. OBX All equities and PCCs* Changes in the relative spread on Oslo Børs The number of local members has shown some decline over time as a result of restructuring in the Norwegian banking and finance sector. One indicator of market liquidity is the number of trading days on which each security is traded. In 2006, some 29% of shares listed in 2006 were traded on every trading day. The equivalent figures for 2005 and 2004 were approximately 30% and 23%. Around 63% of listed shares were traded on at least three out of every four trading days (62% in 2005 and 54% in 2004) while 75% were traded on at least one out of every two trading days (71% in 2005 and 73% in 2004). Another indicator of market liquidity, which has a better theoretical basis, is the relative spread, i.e. the percentage difference between buy and sell orders in the order book. A low relative spread indicates good liquidity. The volume weighted chart above shows relative spread for shares in the OBX index and for all shares/primary capital certificates over recent years. The chart shows an improving trend both for the shares included in the OBX index (the most liquid shares) and for those not included in the OBX. The introduction of a new tick size structure in September 2006 has caused a All equities excluding OBX and PCCs* significant improvement in relative spreads for the securities in the OBX category affected by the change. Confidence quality and image represents the second important factor for a marketplace competing for the interest of investors and issuers. Connecting the customer is the product itself. Accordingly a secure and reliable network, as well as users compliance with rules, are key factors. Exchanges can ensure secure network links through the trading systems they use, but in common with electronic banking services, customers must be confident that their money and securities will be handled in a reliable and safe manner. In addition, customers must be sure that no one else in the market has unfair access to information or is able to unfairly exploit their market position. This all means that the way we supervise our market is crucial to achieving commercial success. Key factors are: Investors perception of the measures in place to protect their interests Investors perception of the quality of supervision and surveillance of member firms and listed companies/securities Investors perception of the quality of information from listed companies The issues considered the most important are market liquidity, the operational reliability of the technical infrastructure (i.e. the trading system), the quality of the regulatory framework and surveillance of the market, as well as the way in which Oslo Børs reacts to breaches of law and regulations. At the time of the last survey, (Summer 2006), when investors were asked to evaluate on a scale from 1 to 5 how well issuers promptly provided essential and relevant information and their general accessibility, the result was just under 4, which is considered to be very good. However, investors evaluation of the Oslo Børs marketplace as a whole fell from a score of 3.7 in the 2005 survey to 3.6 in The areas that investors considered to be weakest were liquidity in share trading, the evaluation of applications for admission listing and the exchange's reaction to breaches of the rules and regulations. Liquidity will, as already mentioned, always be an important theme for any stock exchange. Oslo Børs intends to continue its work on attracting new issuers, members and investors to the Oslo marketplace. It is also considering changes to the microstructure and regulations that could have a positive effect on trading patterns and liquidity in listed securities. 14

15 The outside world s view of Oslo Børs in general is also of interest. Oslo Børs participates in the biannual Yankelovich survey of press opinion on the media activities of companies and other organisations. The overall press view of Oslo Børs is ranked on a scale from 1 to 6, with the extreme scores representing a very negative/ positive overall view. The average for Oslo Børs in 2006 was 4.3 as compared to 4.1 in In both 2004 and 2006 the overall press view of Oslo Børs was more favourable than the reference companies in the survey. Service disruptions and operating problems in major critical systems are another key factor in the area of quality. For Oslo Børs, major critical systems include the trading system, the distribution system for market data and the message system that publishes issuers announcements to the market. The number of incidents of operational failures or problems was significantly higher in 2006 than in Moreover, the proportion of incidents classified as serious was also higher in A number of measures have been implemented to reduce the number of operational incidents. Oslo Børs was certificated for the Norwegian information security management standard (NS 7799) in The cost efficiency that investors, companies and members meet when they participate in the market is the third factor that differentiates stock markets. A feature that exchanges share with banks and telecommunications companies is that very sizeable resources must be committed to building the technological network that permits trading to take place. Once this network is in place, adding more customers and transactions has only a marginal effect on costs until the next capacity threshold is reached. This means that exchanges have high fixed costs that are relatively insensitive to changes in the level of market activity. The key factor here is competitive prices. Research carried out by Oslo Børs into the level of fees charged for major sources of revenue such as listing, trading and financial market data has confirmed that its fees are competitive. One approach to analysing the exchange s cost effectiveness is to compare the net operating margins achieved by a number of similar exchanges. Such a comparison demonstrates that up to and including 2004 Oslo Børs had a somewhat lower operating margin than most comparable exchanges. This reflects a number of factors. A particular factor is the size of Oslo Børs relative to comparable exchanges. The systems Oslo Børs uses to operate the marketplace have capacity in excess of the current level of market activity, and the costs involved are very largely fixed. Oslo Børs saw a very high level of market activity in 2005 and 2006, with increases in both the value of trading and the number of transactions in the equity market in excess of 60% in both years. This has caused a significant increase in operating margin, which serves to underline the economies of scale associated with this kind of activity. By comparison with other exchanges, Oslo Børs operates with relatively low equity capital, and therefore generates a good return on capital employed in both absolute and relative terms. In addition to the three factors named above, Oslo Børs recognises expertise and motivation as a central target area. Highly motivated employees with appropriate expertise are key to achieving our objectives. Over twothirds of our employees have higher education qualifications. Oslo Børs has been able to retain and develop valuable stock exchange expertise by ensuring that its employees are 15

16 offered new challenges within the organisation. However, the strength of the labour market was reflected in an increase in employee turnover in 2006, and Oslo Børs has therefore paid particular attention to retaining critical expertise. When Oslo Børs recruits externally it attracts considerable interest, with applications from a sizeable number of qualified candidates. Interviews with potential employees suggest that Oslo Børs is seen as an attractive workplace. In order to create commitment and motivation, Oslo Børs attaches great importance to a management style based on delegating responsibility, encouraging the involvement of individual employees and fostering personal development. Oslo Børs has assessed employee commitment and identification with our business using the Human Capital index (HCI) and the Strategy index (SI) respectively. Each of these indices is based on a number of questions, with the answers generating a score on a scale from 1 to 5, with 5 as the best score. The indices provide an indication of how well our managers have succeeded in creating the corporate culture we are striving to achieve. The results of these surveys in 2006 gave a score of 3.95 for HCI (3.94 in 2005) and 3.93 for SI (3.86 in 2005) for the organisation has a whole. This is considered to be a good result. There are, however, some variations between different parts of the organisation. Attention will be focused on the areas where the potential for improvement is greatest. In addition, Oslo Børs carries out an annual internal communications survey. The survey carried out in 2006 found that 94% of employees were satisfied with internal information at Oslo Børs. Risk factors Commercial risks Given the current structure of operating revenue for Oslo Børs, turnover is principally affected by: The number of listed securities/companies and their market value The annual fees paid by issuers accounted for approximately 20% of total operating revenue in Operating revenue will fluctuate in line with the number of listed securities and their overall market value. Listing fees for equity instruments are in the main calculated based on the market value at the start of the year. Trading volume and the number of transactions Trading fees accounted for approximately 41% of total operating revenue in These fees are by their nature entirely variable, and the total revenue generated will largely depend on general market conditions. Sales and distribution of financial market data products Sales of financial market data products generated 28% of total operating revenue in Approximately 75% of this revenue arises from sales of real-time information, and is mainly variable in nature since it depends on the number of terminal subscriptions. Sales of financial market data typically have a lagged positive correlation with general market conditions and activity. The risks associated with the revenue categories described above arise from: Competition between marketplaces and changes in the level or structure of their pricing Competition from new players and greater internal trading Competition from alternative forms of saving Consolidation amongst issuers, members and information distributors Accessibility and reliability of technical systems Confidence in the process of price formation and in Oslo Børs as a marketplace Macroeconomic conditions Changes in the regulatory framework Exposure to customer-specific factors Oslo Børs operates with a cost base that is very largely fixed. The operation of marketplaces generally requires a high level of investment, and this together with a high proportion of fixed costs means that there is little short-term flexibility to adapt costs to changes in the actual level of market activity. Strategic risks Structural changes in the international capital market cause continuous changes in the competitive outlook. Failure to adapt to changes may have adverse consequences for the Oslo market s domestic and international position. Strategy Oslo Børs has strengthened its position over recent years, and this has included growth on a scale that few other exchanges have achieved in both activity levels in the marketplaces it operates and in the number of listed companies. Oslo Børs is strongly positioned in a number of attractive segments, and it is very well equipped to meet the challenges the future will bring. As an independent exchange, Oslo Børs enjoys a high degree of freedom of manoeuvre, and takes a positive view of the opportunities to further develop the strong base that it has created over recent years. 16

17 The stock exchange world is characterised by powerful forces of change. It is very likely that various initiatives to integrate exchanges both within the USA and Europe and between these continents will bring about changes in the competitive environment. In addition, future regulatory changes will cause increased competition between important aspects of stock exchange activities. Oslo Børs intends to work aggressively to meet this competition by being flexible and customeroriented. Oslo Børs will develop attractive products at competitive prices and focus strongly on quality assurance of the marketplace and good distribution of its products, as well as maintaining a high level of marketing activity for both the products offered by Oslo Børs and for its listed companies. Oslo Børs participates in the NOREX alliance of Nordic exchanges together with the OMX exchanges. Particular features of this alliance include its common trading system and a regulatory framework that is virtually fully harmonised between the participating exchanges. Oslo Børs has a clearly stated desire to continue its participation in NOREX, recognising that the advantages this brings include a very strong network for distribution to investors around the world. In addition to this participation, Oslo Børs will also continuously evaluate the opportunities for profitable strategic collaboration in specific areas with other players. Oslo Børs will maintain a strong focus on long-term value creation for its shareholders as well as on its efficiency and competitiveness for participants in the securities market. The exchange's objective is that all relevant Norwegian companies will recognise Oslo Børs as the preferred marketplace for listing, and that even more international companies operating in sectors where Oslo Børs is particularly strong will also recognise Oslo as their preferred venue for listing. It is also a continuing target for Oslo Børs to work to increase investor interest in Norwegian securities and to attract additional investment firms to trade directly on the Oslo Børs marketplaces. In 2007, Oslo Børs will place particular priority on the following areas of activity: To actively meet the challenges of MiFID and Transparency Directive with competetive products and services. Efficient trading and settlement Capacity and quality of operations and systems Establishing Oslo Axess Further reinforcing the sectors of the Oslo Børs marketplace that are recognized for their particular strength Oslo Børs is an important part of the securities infrastructure in Norway, and intends to continue its good collaboration with VPS and VPS Clearing on maintaining and developing the entire infrastructure so that it is seen as unified, efficient and competitive by all issuers and investors. 17

18 Further information on operating revenues and operating costs Summary of profit and loss account and balance sheet for the last three years NOK Operating revenues Operating costs Operating profit Pre-tax profit Profit for the year Assets Liabilities Equity Investment spending Operating margin 59.3% 51.8% 37.5% Earnings per share Cash flow per share Cash flow per share before dividend & capital reduction The board of directors' report on page 39 provides a general review of the financial condition of Oslo Børs. Information on strategy and action plans for 2007 can be found on page 12 of the annual report. Information on fees and prices for the products and services provided by Oslo Børs can be found at Composition of operating revenue As can be seen from the organisation chart on page 37, Oslo Børs divides its operational responsibility for the operation of the stock exchange between several departments. The revenue- generating activities are carried out by two departments, namely Markets and Information Services. These make up the two segments of the business of Oslo Børs. Segmental information is provided in note 2 to the annual accounts. More detailed information on the composition of operating revenue for the areas of activity that make up the two segments is shown below. Internal operating revenue recognized by Markets principally relates to a share of income from sales of market data in accordance with an agreement Operating revenue by segment Markets Equity Markets Fixed Income Markets Derivatives Markets Internal revenue (from Information Services) Other Total operating revenue - Markets Information Services Internal revenue (from Markets) Total operating revenue Information Services Netting of internal revenue (77 951) (59 419) (55 924) Total operating revenue between Oslo Børs ASA and Oslo Børs Informasjon AS. Internal operating revenue recognized by Information Services from Markets relate to consideration for services carried out on behalf of Markets. Equity Markets The Equity Markets area s operating revenue accounted for around 63% of total operating revenue for Oslo Børs in The revenue generated from fixed fees paid by issuers (annual listing fees) is dependent on the number of listed companies and their market capitalisation. Revenue from fixed fees paid by members depends on the number of active member firms. Trading fees reflect the number of transactions carried out and their value. Prospectus, admission and registration fees depend on the number of new companies admitted to listing as well as the number and size of share issues and other equity transactions carried out by listed companies. A change of 10% in the market capitalisation of listed companies at 31 December 2006 would cause a change of approximately 5% in annual revenue from listing fees. The most widely traded equity market security accounted in 2006 for 6% of the total number of trades (6% in 2005 and 7% in 2004) and 21% of total trading value (22% in 2005 and 18% in 2004). Revenue generated from, or in relation to, this company in 2006 accounted for 9% of the Equity Markets area s operating revenue (8% in 2005 and 2004) and 6% of total operating revenue for Oslo Børs (4% in 2005 and 2004). Fixed Income Markets The Fixed Income Markets area s operating revenue accounted for around 5% of total operating revenue for Oslo Børs in The revenue generated from fixed fees paid by issuers (annual listing fees) is 18

19 Operating revenue - Equity Markets NOK million Fixed fees - issuers Fixed fees - members Trading fees Prospectus and admission fees Registration fees Financial market data Fees for courses/seminars Other income Total operating revenues No. of listed companies at Benchmark index (OSEBX) at Market value of listed companies at No. of member firms - equity markets No. of trades (1,000) Value of trades (NOK bn) Operating revenues - Fixed Income Markets NOK million Fixed fees - issuers Fixed fees - members Trading fees Prospectus and admission fees Financial market data Fees for courses/seminars Other income Total operating revenues No. of listed issues at (main market) No. of listed issues at (ABM) Market value of listed issues at No. of member firms - fixed income Value of trades exc. repos (NOK billion) Value of repo trading (NOK billion) Figures for market value and turnover include both the main market and ABM bond loans. dependent on the number of listed fixed-income issues and their nominal value. Revenue from fixed fees paid by members depends on the number of active member firms. Trading fees reflect the number of transactions carried out and their value. Prospectus fees depend on the number of prospectuses submitted for inspection in accordance with the Securities Trading Act and registration documents submitted for inspection in accordance with the Rules for the admission of fixed income financial instruments to listing on the ABM, including the continuing obligations of issuers. A repo is a repurchase agreement whereby the parties simultaneously agree the sale and future repurchase of a specified amount of a bond issue. Repo transactions incur trading fees equivalent to 10% of the rate for a normal trade. The borrower with the greatest volume of loans outstanding at the close of 2006 accounted for 97% of total outstanding bonds and 99.7% of total outstanding commercial paper. Revenue from this issuer accounted for 3% of the Fixed Income Markets area s operating revenue from the primary market in Derivatives Markets The Derivatives Markets area accounted for just over 4% of total operating revenue for Oslo Børs in Trading fees accounted for 89% of the area's revenue. The revenue from trading fees is dependent on the number of contracts traded and the premiums paid. The premium paid on a derivatives contract is determined principally by the price of the underlying instrument, the period to maturity and, in the case of options, the price volatility of the underlying instrument. Information Services External revenue from sales of financial market data amounted to NOK 135 million in 2006, making up some 27% of total operating revenue for Oslo Børs (28% in 2005). Sales of real-time information through information distributors such as Reuters and Bloomberg accounted for around 78% of this area s operating revenue in The level of operating revenue is mainly determined by the number of remote terminals that have access to market data from Oslo Børs. Customers of information distributors such as Reuters, Bloomberg etc. purchase access to price and index information from various markets. Income from sales of financial market data increased by 33% in The number of terminals with access to market information from Oslo Børs increased by 29% between 2005 and Oslo Børs offers three types of subscription to real-time information: Professional users with full access to real-time information, private individuals with limited access to real-time information and private individuals with full access to real-time information. Changes were made to the pricing structure in October As a result of these changes, growth in 19

20 Operating revenues - Derivatives Markets NOK million Fixed fees - issuers Fixed fees - members Trading fees Prospectus and admission fees Financial market data Fees for courses/seminars Other income Total operating revenues Equity options, No. of contracts traded (1000) Equity options, turnover (NOK million) Index options, No. of contracts traded (1000) Index options, turnover (NOK MILLION) Equity forwards, No. of contracts traded (1000) Equity forwards, turnover (NOK MILLION) Index forwards, No. of contracts traded (1000) Index forwards, turnover (NOK MILLION) Total No. of contracts Total value of turnover - options Total value of turnover - forwards Average premium equity options Average premium index options Average premium equity forwards Average premium index forwards revenue is slower than growth in the number of terminals. These three products accounted for 70%, 20% and 10% respectively of the total number of terminals in use in 2006 (72%, 19% and 9% in 2005 and 78%, 16% and 6% in 2004). Professional users with full access to real-time information pay NOK per annum for each terminal (NOK also in 2005). Private individuals with limited access to real-time information pay NOK 120 per annum (NOK 720 until October 2006). Private individuals with full access to realtime information pay NOK 1,200 per annum (NOK until October 2006). The two largest distributors accounted for around 60% of the Information Services area s operating revenue in 2006, while the four largest distributors accounted for 64% of operating revenue. Other income, which accounts for 22% of the Information Services area's total revenue, comes from sales of a number of other products such as newspaper lists, index weighting products, SMS text services and Internet advertising. The two products that make the largest contributions to revenue are fundamental data about issuers and mutual funds information. Operating costs Salary and other personnel costs increased by NOK 11 million from NOK 91 million in 2005 to NOK 102 million in In 2006, Oslo Børs launched a defined contribution NOK Salary and other personnel costs Depreciation Other operating costs Total operating costs pension scheme for some of its employees. The transitional effect of the migration from a defined benefit scheme to a defined contribution scheme is estimated at NOK 4 million, and is recognised through the profit and loss account (cost reduction). A provision of NOK 12.3 million was recognised in 2006 in connection with pension liabilities that Oslo Børs took on when appointing the new President & CEO. According to the employment contract agreed in September 2005, the President & CEO shall have a full pension contribution period at Oslo Børs and full pension from Oslo Børs at retirement age (62 years). In 2005, a charge of NOK 4.8 million in addition to normal pension costs was recognized in respect of a change in the basis of pension calculation for the former President & CEO. Operating costs for 2005 also included extraordinary variable salary payments for 2006 of approximately NOK 3 million. After correcting for these items, salary and staff costs show a year-on-year increase of NOK 10 million equivalent to 11%. The increase reflects the annual salary increase on 1 January and an increase in the number of employees from Other operating costs increased by NOK 16 million from NOK 66 million in 2005 to NOK 82 million in The increase principally reflects temporary resources for operational support and systems projects (NOK 8 million), higher variable trading system costs (NOK 2 million), marketing activities (NOK 1 million), lower contributions to costs from IT collaboration with other NOREX exchanges (NOK 1 million), and maintenance costs for premises and technical equipment (NOK 1 million). Oslo Børs expects that its total operating costs for 2007 will be in the order of NOK 230 million. Additional resources will be allocated in 2007 to systems adaptation, expanding capacity, sales and marketing and product development. In addition, investment spending in the order of NOK 20 million is planned. 20