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EUROPEAN FINANCE eJOURNAL


Vol. 4, No. 108: Aug 15, 2012

JOHN A. DOUKAS, EDITOR


William B. Spong, Jr., Chair of Finance, European Financial Management (EFM) Managing Editor, Old Dominion University College of Business & Public Administration

jdoukas@odu.edu
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The EUROPEAN FINANCIAL MANAGEMENT ASSOCIATION (EFMA), will be holding its 21TH Annual Meeting in BARCELONA, SPAIN from June 27-30, 2012. Papers are encouraged from all areas of Finance. The EFM Journal will hold its annual "Merton H. Miller" DOCTORAL SEMINAR, as part of the EFMA 2012 Annual Meetings, for Advanced Finance Doctoral Students who are currently working on their dissertation, on June 27, 2012 in BARCELONA, SPAIN. Please Visit the EFMA Website For Details: http://www.efmaefm.org

Table of Contents
Features and Working of the French Stock Market Kundan Jha, National Law University, Jodhpur Viraj Grandhi, affiliation not provided to SSRN Features of Stock Market and its Functioning: Sweden Varun Natarajan, affiliation not provided to SSRN Akshay Vasistha, affiliation not provided to SSRN Stock Market of Turkey Prateeti Goyal, affiliation not provided to SSRN Kriti Sinha, affiliation not provided to SSRN Working and Features of Stock Market of Greece Sibani Saxena, National Law University, Jodhpur Chandni Anand, affiliation not provided to SSRN CISS A Portfolio-Theoretic Framework for the Construction of Composite Financial Stress Indices Manfred Kremer , European Central Bank (ECB) Daniel Hollo, affiliation not provided to SSRN Marco Lo Duca, European Central Bank (ECB) ^top

EUROPEAN FINANCE eJOURNAL


"Features and Working of the French Stock Market" KUNDAN JHA, National Law University, Jodhpur Email: kundan.j20@gmail.com VIRAJ GRANDHI, affiliation not provided to SSRN A study of the French stock market focusing on the historical evolution of the market and contemporary set-up. Studies the primary features of the market and key institutions and ingredients of the market. "Features of Stock Market and its Functioning: Sweden"

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VARUN NATARAJAN, affiliation not provided to SSRN Email: vare.say@gmail.com AKSHAY VASISTHA, affiliation not provided to SSRN A paper discussing the various features and the working of the stock market in Sweden. "Stock Market of Turkey" PRATEETI GOYAL, affiliation not provided to SSRN Email: prateeti8@gmail.com KRITI SINHA, affiliation not provided to SSRN This paper gives an overview of the Stock Market of Turkey. "Working and Features of Stock Market of Greece" SIBANI SAXENA, National Law University, Jodhpur Email: sibanisaxena@gmail.com CHANDNI ANAND, affiliation not provided to SSRN The Paper discusses the existing stock market in Greece, its history and working. The Athens Exchange which is the oldest Stock Exchange in Greece has been studied. "CISS A Portfolio-Theoretic Framework for the Construction of Composite Financial Stress Indices" MANFRED KREMER, European Central Bank (ECB) Email: manfred.kremer@ecb.int DANIEL HOLLO, affiliation not provided to SSRN Email: daniel.hollo@ecb.europa.eu MARCO LO DUCA, European Central Bank (ECB) Email: Marco.lo_duca@ecb.europa.eu This paper introduces a new indicator of current stress in the financial system as a whole named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped in accordance with standard definitions of systemic risk. The main innovative feature of the CISS is the application of portfolio theory to the aggregation of individual stress indicators into the composite index. Along the lines of how portfolio risk is computed from the risks of individual assets, we propose to compute the level of stress in the system as a whole by aggregating five market-specific subindices of stress - comprising a total of 15 individual stress indicators - on the basis of a time-varying measure of the cross-correlations between them. The CISS thus puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and hence more hazardous for the real economy if instability spreads more widely across the whole financial system. Applied to data for the euro area as a whole, we determine within a threshold VAR model an endogenous systemic crisis-level of the CISS at which financial stress tends to depress real economic activity materially. ^top

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European Finance eJournal GIOVANNI BARONE-ADESI Professor, Swiss Finance Institute at the University of Lugano, Swiss Finance Institute BRUNO BIAIS Fellow, Centre for Economic Policy Research (CEPR) JOS FILIPE CORREIA GUEDES Associate Professor of Finance, Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies FRANCOIS DEGEORGE University of Lugano - Faculty of Economics, Swiss Finance Institute Professor, Swiss Finance Institute, European Corporate Governance Institute (ECGI) ELROY DIMSON Professor Emeritus, London Business School, Visiting Professor, University of Cambridge - Judge Business School GUENTER FRANKE University of Konstanz - Department of Economics KEES G. KOEDIJK Dean Faculty of Economics and Business Administation, Tilburg University - Department of Finance BENI LAUTERBACH Technion-Israel Institute of Technology, Chairman of Finance, Bar Ilan University - S. Daniel Abraham School of Business Adminstration COLIN MAYER Peter Moores Professor of Management Studies (Finance), University of Oxford - Said Business School, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI) LARS TYGE NIELSEN affiliation not provided to SSRN MARCO PAGANO Professor of Economics, University of Naples Federico II - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI) K. GEERT ROUWENHORST Professor of Finance; Deputy Director, International Center for Finance, Yale School of Management International Center for Finance HENRI SERVAES Professor of Finance, London Business School, Fellow, Centre for Economic Policy Research (CEPR) BRUNO SOLNIK

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Professor, Hong Kong University of Science & Technology (HKUST) - Department of Finance TON A.C.F. VORST VU University Amsterdam - Department of Finance and Financial Sector Management, Tinbergen Institute Tinbergen Institute Amsterdam (TIA) CLAS WIHLBORG Professor, Chapman University CHRISTIAN C. P. WOLFF Director, Professor of Finance, University of Luxembourg - Luxembourg School of Finance, Research Fellow, Centre for Economic Policy Research (CEPR) ^top
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FEATURES AND WORKING OF THE STOCK MARKET IN FRANCE

Electronic copy available at: http://ssrn.com/abstract=2122576

TABLE OF CONTENTS

I. II.

FRENCH STOCK MARKET-A HISTORICAL OVERVIEW ................................... 2 FEATURES OF THE STOCK MARKET....................................................3 II.1 Paris Bourse/Euronext Paris ........................................................ 3 II.2. Autorite des marches Financiers(AMF) .......................................5 III. WORKING OF THE STOCK MARKET ...................................................7 IV. CONCLUSION ....................................................................................... 9 V. BIBLIOGRAPHY..10

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Electronic copy available at: http://ssrn.com/abstract=2122576

FEATURES AND WORKING OF THE STOCK MARKET IN FRANCE


1 Authors : Kundan Jha, Viraj Gandhi

French Stock Market- A Historical Overview: France, one of the founding fathers of European integration culminating in the formation of European Union, paid a heavy price both in economic and human terms during the two world wars. 2 Hence, the role of financial markets and instruments in reconstruction of the country can not be overstated. The history of financial markets in France can be termed extensive but tumultuous. The Lyons Bourse was set up in the first half of the 16th century. Brokers known as courratires and later as agent de change were regulated through royal orders in their dealings of securities and commercial bills. However, lack of an organized stock exchange and the distrust of investors in their working, disadvantaged the entrepreneurs of France as raising capital was a tough task. Several attempts were made to create a stock exchange in Paris such as a 1724 order of the Royal Council of State; however the idea of raising money through issuance of shares was dismissed by some as a fantasy.3 Primarily, lack of suitable regulations was one of the main reasons for failure of financial market in France which was remedied by the First Empire (Napoleonic Empire) in the early part of the 19th century when detailed regulation giving Banque de France the exclusive right to issue currency and administering the formation of Joint Stock Companies and conduct of intermediaries were formulated. The famous Paris Bourse itself was recognized in 1801 and by 1853 around 152 stocks were quoted on the bourse. Gradually key constituents of any vibrant financial market such as limited companies, bonds and foreign stocks found traction in France. Provincial stock exchanges also came into their own by the advent of 20th century.
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Students of National Law University, Jodhpur- Paper completed under guidance of Dr. Rituparna Das, Faculty of Management. 2 France Country Profile, @ http://news.bbc.co.uk/2/hi/europe/country_profiles/998481.stm#overview 3 Mirabeau , Pamphlet On The Shares of Compagnie des Eaux de Paris

The next phase of the evolution of financial markets involved consolidation and competition. In 1967, a single national company composed of the 118 agents in the French exchanges was formed and within the next ten years rapid consolidation saw the number decrease to 61. The 80s saw the transition to electronic trading as well as the launch of futures exchange and equity options exchange. Finally, in one final step of consolidation, Frances market operators formed the Paris Bourse SBF SA in 1999 which was a precursor to the formation of EuroNext Paris, the first pan-European exchange established in September 2000 by the merger of Paris, Amsterdam and Brussels and Lisbon bourses with it centre at Paris Bourse.4

Features of the Stock Market

1.1. Paris Bourse/ Euronext Paris: Euronext Paris, the national stock market of France currently has a total of 586 company listings (excluding investments funds) of which 528 are domestic companies and 58 are foreign. The total market capitalization was 1,197,013,000,000 as of 31 December 2011 which was a 16% decline against 2010. It is the second largest exchange in Europe behind the UK's London Stock Exchange. 1.2. Indices:5 The main benchmark for NYSE Euronext Paris is CAC 40 index which contains 40 equities selected among the top 100 market capitalization and the most active listed equities. The index tracks a sample of blue-chip equities and its performance is closely related to that of the market as a whole and it serves as the underlying asset for futures contracts. Its components are included in the broader SBF 120 Index, a benchmark for investment funds. The SBF 250 index, a benchmark for the long-term performance of equity portfolios, includes all of the SBF 120; it is structured by sector. The MIDCAC index includes 100 of the most liquid medium-size stocks on the Premier March and Nouveau March calculated on the basis of opening and closing prices, while the Second

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Paris: It Started with the Lyons Bourse, @ http://www.nyx.com/who-we-are/history/paris http://www.nyx.com/indices

March index focuses on that market. Both indices are benchmarks for funds. The Nouveau March Index represents stocks in the growth market. The SBF-FCI index is based on a selection of convertible bonds that represent at least 70% of the total capitalization of this market, calculated twice daily The Market operates in four different sections listed below: 1. The Official Stock Exchange (Marche Officiel): It is dedicated to large companies with at least 25% of their equity publicly held. 2. The Second Market (Second Marche): A market intended for companies that are not large enough to be traded on the Official Market. It is considered as temporary stage for companies, a preliminary stage before upgrading to the official market. 3. The New Market (Le Nouveau Marche): It is an index on Euronext Paris that includes start-ups and other high-risk, high-growth companies. Companies on the Nouveau Marche seek capital to finance their future growth. 4. The Over the Counter Market: A temporary market used for occasional transactions in non-listed securities.6 Other French securities markets are the Financial Futures Market (MATIF) and Financial Options Market (MONEP). 1.3 Financial Futures Market (MATIF): This Futures Exchange comes under Euronext Paris and is engaged in trading of French futures which is a financial derivative contract referring to the average power spot market prices of future delivery periods i.e. trades futures and options on interest rate products and commodities. Base load and peak load futures are available. The France Day Base or the France Day Peak Month index calculated by EPEX SPOT constitutes the underlying base. French Futures are traded for the current week, the next four weeks, the current month, the next six months, seven quarters and six year.7The products available include Metals, Interest Rates, Equity Indices, Energy, Currencies, Agricultural products etc. They also include options on the Euro notional bond, five-year Euro and three-month
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Amin N. Licht, Harward Law School, Stock Market Integration in Europe. @ http://pdf.usaid.gov/pdf_docs/PNACH173.pdf 7 French Financial Futures @ http://www.eex.com/en/EEX/Products%20%26%20Fees/Power/French_Financial_Futures

PIBOR (Paris Interbank Offered Rate), and futures on the 30-year Eurobond and twoyear E-note, and index futures on the CAC 40. 1.4 Financial Options Market (MONEP): It is a section of Euronext Paris on which stock and index futures and options are traded.8 It trades short-term and long-term stock options and futures and options on a family of Dow Jones indices. All trades occur electronically. It was established in 1987 and merged with the Paris Bourse in 1999. 1.5 FREE MARKETS: The free market was launched in Paris in 1996 and is currently operated by NYSE Euronext providing small (micro-cap) companies with easy access to an IPO and a framework adapted to their specific needs. These multilateral trading facilities provide a channel for disseminating buy and sell orders with simpler admission procedures and low costs. All transactions on the free market are cash settled and trades are executed through a single fixing per session. As of 2010 296 companies were listed on the Free Market Paris. The free markets are however less liquid than traditional markets and in 2009 monthly turnover was 10 million 9

2.1 Autorite des marches Financiers (AMF): In 2003 the Financial Security Act of 1st August 2003 created the Autorite des marches financiers (AMF), an independent body responsible of regulation of securities market. Commission des operations de bourse (COB), the Conseil des marches financiers (CMF) and the Conseil de discipline de la gestion financiere (CDGF) were amalgamated to improve the effeciency and visibility of Frances financial regulatory system. AMF has legal personality and financial autonomy with a mission to 1. Act as a body to safeguard investments in financial instruments and in all other savings and investment vehicles. 2. Make sure that investors receive material information. 3. Maintain orderly financial markets

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QFINANCE The Ultimate Resource, 2009 Bloomsbury Information Ltd Free Markets, NYSE Euronext @ https://europeanequities.nyx.com/listings/free-markets

4. Lend support to financial market regulation at the European and International level. 2.2 Composition of AMF: The AMF constitutes a Board with 16 members, an enforcement committee with 12 members and other specialized and consultative commissions. The finance minister of France has the authority to designate the Director General of the Treasury or his representative who has a non-voting seat on all bodies of AMF. The Chairman of the body is named through a decree by the President of the French Republic for a nonrenewable five-year term. The staff of the body is headed by a Secretary General and is composed of public servants under contract as well as private employees. As of year-end 2010 the total number of staff numbered 403. 2.3 Responsibilities of AMF: Broadly the responsibilities entrusted to AMF can be classified into four kinds namely: 1. Regulation 2. Authorization 3. Supervision 4. Enforcement AMF exercises jurisdiction over corporate finance activities and disclosures by requiring them to inform the public regularly about their business, results and financial dealings. It also oversees and monitors information to ensure its accuracy, preciseness, fairness and timely submission as well as maximum dissemination. In addition AMF authorizes the creation of open-end and closed-end funds. It verifies the information set out in the prospectus and ensures that the special features of structured funds and their effects are clearly communicated to the investors. The AMF also has the task of setting up principles of organization and operation applicable to market operators such as Euronext Paris and approves the rulebooks of clearing houses such as Clearnet. Lastly AMF formulated conduct of business rules and other requirements applicable to investment services professionals as well as professional organizations. The AMF has been empowered to conduct inspections and investigations. The Enforcement Committee may impose penalties and sanctions to punish breaches of its regulations and obligations. Where criminal conduct is suspected, the AMF board can

refer the matter to public prosecutor and submits the inspection and investigation report to the appropriate authority.10

Working of the Stock Market: 1.1Supervision of NYSE Euronext Paris: The exchange is governed by the French Monetary and Financial Code pursuant to which the French Minister of Finance has the authority to confer or revoke regulated market status upon recommendation of AMF and an opinion form the French Banking Commission. Market status is granted only if the market meets specific conditions for proper operation. Since the exchange is also approved as specialized financial institution it is governed by the French banking legislation and regulations such as French Banking Act. It is also subject to Comite des Establissements de Credit et des Enterprises dInvestissement (CECEI) as well as the Commission Bancaire.11 1.2 Procedure of Admission of Financial Instruments:12 The application to admit trading on the exchange to market a financial instrument has to be submitted by the issuer with the support of one or more financial intermediaries sponsoring the issue. The exchange has to inform the AMF and seek its observations within five trading days. Such observations have to be an integral part of the factors taken into consideration when making the decision on application of admission. Further, the application may be denied if the exchange believes that the issuer does not have control of an essential operating asset. Similarly different conditions have been imposed on admission of collective schemes, depository receipts and bonds. 1.3 Classification of Securities into Market Capitalization Compartments:13 The securities traded at the exchange have been allocated into different compartments according to their market capitalization by taking into account following factors:
10

Information obtained from official website of AMF @ http://www.amffrance.org/affiche_page.asp?urldoc=lesmissionsamf.htm&lang=en&Id_Tab=0 11 Information obtained from official website of NYSE Euronext @ https://europeanequities.nyx.com/markets/nyse-euronext/paris 12 Euronext Rule Book- Book II, Specific Rules Applicable to the French Regulated Markets @ https://europeanequities.nyx.com/sites/europeanequities.nyx.com/files/book_ii_specific_rules_applicable_t o_the_french_regulated_markets_27_july_2012.pdf 13 Notice 6-02 related to the classification of securities into market capitalization Compartments.@ https://europeanequities.nyx.com/sites/europeanequities.nyx.com/files/Euronext_Notice_ndeg_602_EN.pdf

1. Shares of the main line.14 2. New Shares at the moment at which they are admitted to listing. 3. Preference Shares as far as they are admitted for listing. 4. Market capitalization of the underlying shares of and IDR Based on these factors securities have been allocated into following compartments according to their market capitalization: 1. A- Issuers with market capitalization superior to 1 billion Euros. 2. B- Issuers with market capitalization between 150 million Euro and 1 billion Eros 3. C- Issuers with market capitalization lower than 150 million Euros. 1.4 Placing procedures15: The placing of financial instruments is done either in whole or in part through a complete or partial underwriting transaction by one or more legally authorized entities. The lead manager has to place before the exchange a statement detailing the results of the placing. The placing can be carried out as a fixed-price offer or open price offer however in both cases final price can not be higher than the placing price. 1.5 Initial-Trading Procedures16: The initial trading on the exchange is effected through the following procedures subject to disclosure of segment of the market, name of the issuer and intermediaries, the number, type and characteristics of the admitted financial instruments as well as the price stipulated by the issuer and lodging of sufficient deposit: 1. Minimum-Price-Tender Procedure: In this method the specified number of instruments made available to the market and the minimum offer price is announced. The right to modify the minimum price can be reserved by the issuer. The shares are then offered on the market into several lots and the price fixed is the limit set on the last order. 2. Fixed-Price and Open-Price Procedure: The number of instruments and offer price or price-range is specified with an option to reserve the right to modify the
14

Ibid, The opening price is used for the valuation of every line and the capitalization is based on the average of the opening prices noticed daily over 60 Trading days preceding the date of the review. 15 Art 1.2.2 to 1.2.4, Euronext Rule Book- Book II, Specific Rules Applicable to the French Regulated Markets@https://europeanequities.nyx.com/sites/europeanequities.nyx.com/files/book_ii_specific_rules_ap plicable_to_the_french_regulated_markets_27_july_2012.pdf 16 Ibid, Art 1.2.5- 1.2.17

price component. The offer may be divided into several lots and buy orders consistent with the price range are accepted by the exchange and if the offer is successful, the price quoted is determined at the end of the offer. 3. Direct Trading Procedure: In this procedure as stated number of equity securities offered are sold through a bought deal on behalf of the shareholders or underwriters. 1.6 Types of transactions17: Two kinds of transactions can be executed on the market namely cash transactions which are executed on the exchange and linked transactions which consist of a cash trade linked to an offsetting-delivery transaction at a deferred maturity date and are subject to a special matching procedure. Chapter 2 of the rule book gives the detailed requirements of executing a DSO (deferred settlement and delivery) and instructions 18 issued by the exchange also have a bearing on the issue.

Conclusion The study shows that the French Stock market is highly dynamic and organized giving an opportunity to all stakeholders to participate in the financial system. It has a strong regulatory body and efficient stock exchange to regulate the proceedings and therefore has the ability to adapt with changing market conditions.

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Supra Note 1, chapter 1 Instruction N4-02 Applicable to the Eurolist Market, Linked Transactions and order for Deferred Settlement and Delivery (DSO)@ https://europeanequities.nyx.com/sites/europeanequities.nyx.com/files/CashForward_linked_transactions_and_the_order_for_Deffered_Settlement_and_delivery_DSO.pdf

BIBLIOGRAPHY Articles:

1. Mirabeau , Pamphlet On the Shares of Compagnie des Eaux de Paris 2. Paris: It Started with the Lyons Bourse, NYSE Euronext 3. Amin N. Licht, Harward Law School, Stock Market Integration in Europe. Rules: 1. Euronext Rule Book- Book II, Specific Rules Applicable to the French Regulated Markets. 2. Notice 6-02 related to the classification of securities into market capitalization Compartments 3. Instruction N4-02 Applicable to the Eurolist Market, Linked Transactions and order for Deferred Settlement and Delivery (DSO) Websites: 1. https://nyx.com/ 2. http://www.amf-france.org/

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