Spanish Stock Market

SPANISH STOCK MARKET AND THEIR DIFFERENTATION STRATEGIES IN EUROPE

Dr. D. Antonio Sainz FuertesCatedrático Organizacíon de Empresas

Paper presented toUnion of Investment Companies

Kuwait 23-1-2008

2

• INTRODUCTION• Why Finance Matters• The Flow of Savings to Corporations• Functions of Financial Markets• Functions of Financial Intermediaries• Value Maximization and Cost of Capital

Topics Covered

3

Financial Markets

Primary

Markets

Secondary

Markets

OTC

Markets

Money

4

Financial Markets

• Financing Decision– Source of Funds “Capital”– Capital Structure– Money Markets– Euros

5

Financial Markets

(1) Investors buy shares with cash

(1)

(4b) Cash returned to investors

(4b)

(4a) Cash reinvested

(4a)

(3) Timber harvest generates cash

(3)

(2)Cash is invested

(2)

FinancialManager

Firm'soperations

Investors

Real assets

(timberland)

(stockholders save and invest in closely held firm.)

6

Financial Markets

Company

Issue Debt

CashInvestors

7

Financial Markets

Investors Investors

Bank of Bank of AmericaAmerica

Windsor Windsor FundFund

$ $

Sells shares

Issues shares

8

Financial Markets

Investor

Intermediary

Funds

Funds

Company

Banks

Insurance Cos.

Brokerage Firms

Obligations

Depositors

Policyholders

Investors

Obligations

9

Financial Markets

Banks

Depositors

$2.5 mil

Cash

Loan

Company

Intermediary

Investor

Deposits

10

Financial Markets

Insurance Company

Policyholders

$250 mil

Sell policies Issue Stock

Company

Intermediary

Investor

Cash

Loan

11

Function of Financial Markets

• Transporting cash across time• Risk transfer and diversification• Liquidity• Payment mechanism• Provide information

12

U.S. Financing

• Information Provided by Financial Markets

- Commodity prices- Interest rates- Company values

13

1. Introduction :Spanish Stock Market

2. Structure of the Markets

2.1.- Markets

2.2.- Stock Markets

2.3.- Derivatives and Public Debt Markets

2.4.- Settlement and Supervision of the Markets

3. Requeriments for membership to “Bolsa de Madrid”

4. The IBEX 35

4.1.- Rules of conduct

4.2.- The Technical Adversory Conmitee

14

INTRODUCTION

Bolsas y Mercados Españoles (BME) encompasses the companies that direct and manage the securities markets and systems in Spain.

BME is the Spanish markets’ response to the new international financial setting, where investors, intermediaries and firms demand an ever-expanding range of services and products within a framework of security, transparency, flexibility and competitiveness.

Spanish markets have attained a top-level size within the European setting and a diversified structure that covers the entire chain of value in securities markets from trading to settlement, including the provision of information and data-processing services.

15

INTRODUCTION

Europe.

16

STRUCTURE OF THE MARKETS: MARKETSAccording to Spanish Securities Market Law (LMV):

"These are official secondary securities markets which operate on a regular basis in accordance with the provisions of this law and the regulations which develop it especially with regard to conditions of market access, listing, operating procedures, information and advertising. The following markets shall be deemed to be official secondary securities markets:

Stock Markets.•The Public Debt Market. •Futures and Options Markets whatever the underlying security, be it financial or otherwise. •Any others, of a national scope,which, meeting the requirements provided, are authorised within the framework of the provisions of this Law and the regulations developing this, and those of a regional scope, which are authorised by the autonomous communities with relevant powers."

17

STRUCTURE OF THE MARKETS: Stock Markets

The Spanish stock markets (Madrid, Bilbao, Barcelona and Valencia) are official secondary markets which carry out exclusive trading in shares and convertible shares or which grant acquisition or subscription rights. In practice, equities issuers also use these bourses as primary markets for their share issues or rights issues.

The “Sociedad de Bolsas” is owned by the four Spanish stock markets and is responsible for technical management of the Spanish Stock Market Interconnection System (Sistema de Interconexión Bursátil Español, SIBE).

18

STRUCTURE OF THE MARKETS: Derivatives and Public Debt Markets

•Derivatives markets are organised by MEFF (Mercado Español de Futuros Financieros). MEFF manages trading in options and futures on the IBEX-35, on interest rates and bonds and on individual equities.  Public

•Public Debt Market comprise bonds and T-bills and debt issued by other Public Administrations and Entities. These securities are also traded simultaneously on the Stock Markets which have a specific regime for this purpose. The Bank of Spain is the governing body of this market.

19

STRUCTURE OF THE MARKETS:Settlement and Supervision of the Markets

• The administration of the settlement and clearing of securities traded on Spanish stock markets is the responsibility of a specific company, IBERCLEAR, the resultant merger between SCLV and CADE (effective from April 2003).

• IBERCLEAR is responsible for maintaining the book-entry registry of listed securities.

• Spanish Securities Market Law entrusts the Spanish Stock Exchange Commission with the supervision and inspection of the securities markets and of the activity of all physical and legal persons involved therewith, the exercising of disciplinary powers over these and other functions.

20

REQUIREMENTS FOR MEMBERSHIP TO STOCK MARKET OF MADRID

Membership to stock market of Madrid is open to Spanish investment firms and credit entities, as well as to foreign entities, inside and outside the European Union.

Within the European Union, investment firms and credit institutions are subject, respectively, to the terms of the Council Directive 93/22/EEC, of 10 May.

Outside the European Union are subject to obtaining express authorisation for that purpose, to be issued by the Ministry of Economy, at the proposal of the Comisión Nacional del Mercado de Valores (CNMV).

21

THE IBEX 35

IBEX 35® is the Official Index of the Electronic Market of the Spanish Stock Exchange. Sociedad de Bolsas calculates, publishes and disseminates this index in real time. The surveillance of the index is responsability of the Technical Advisory Committee.

22

THE IBEX 35

The IBEX 35® is the index made up by the 35 most liquid securities traded on the Spanish Market, used as a domestic and international benchmark and as the underlying index in the trading of derivatives. Technically it is a price index that is weighted by capitalization and adjusted according to the free float of each company comprised in the index.

23

THE IBEX 35: RULES OF CONDUCT(APPLICABLE TO THE MEMBERS OF THE TECHNICAL

ADVISORY COMMITTEE OF THE IBEX® INDICES The Technical Advisory Committee of the IBEX®Indices are observing some strict rules of behaviour in their deliberations and actions, which seem appropriate to formalise in a text of regulations which covers the same in a systematic and coherent manner.

The Board of Directors of Sociedad de Bolsas, after having met on April 13, 2000, has approved the following rules of conduct applicable to the members of the Technical Advisory Committee of the IBEX®Indices.

24

THE IBEX 35: RULES OF CONDUCT(APPLICABLE TO THE MEMBERS OF THE TECHNICAL

ADVISORY COMMITTEE OF THE IBEX® INDICES)1. Range of application and scope.

2. Conflicts of interest.

3. Use of information.

4. Relevant information

5. Executing transactions.

6. Duty of confidentiality and communication mechanisms.

25

THE TECHNICAL ADVISORY COMMITTEE OF THE IBEX® INDICES

The Technical Advisory Committee in charge of the Indexes is composed of a minimum of fi ve and maximum of nine members. Their functions are:

• To supervise that the calculation of the Indexes is carried out by the Manager in accordance with the present Technical Regulations for the Composition and Calculation of the Sociedad de Bolsas, S.A. Indexes then in force.

• To ensure ensure the proper operation of the Indexes for use as an underlying index for trading in financial derivatives,

• To study and approve the redefi nitions of the Indexes when it deems appropriate and at least every six months,

• To report any modification regarding point 3 of these Technical Regulations for Indexes Calculation.

26

TEN KEY QUESTIONS ABOUT IBEX 35:Ten Key Questions on the criteria for choosing the securities

making up the IBEX 35® INDEX

1. May a security be chosen to be included on the IBEX 35® by taking into account the sectors already represented on the index?

2. Are the shares making up the IBEX 35® those of the 35 largest companies?

3. According to the Technical Regulations for the Composition and Calculation of the Sociedad de Bolsas, S.A. indices, the IBEX 35® is made up by the 35 most liquid securities during the control period. How is the liquidity of securities measured for the purpose of choosing them?

27

TEN KEY QUESTIONS ABOUT IBEX 35

4. What are the minimum requirements that must be met by a security for it to become a candidate for the IBEX 35®? Is it necessary that the security be traded during the entire control period prior to the Committee meeting for it to be chosen?

5. Is a security whose price rises dramatically over a long period an ideal candidate to be included on the IBEX 35®?

6. Are long-term forecasts made in any way regarding the circumstances surrounding a security for its inclusion on or exclusion from the IBEX 35®?

7. What information does the Committee use to make its decisions?

28

TEN KEY QUESTIONS ABOUT IBEX 35

8. What number of shares is considered when deciding to include a security on the IBEX 35®?

9. Throughout the life of a company there may be relevant facts affecting its present and future: capital increases, mergers, segregations, takeovers, etc. If the IBEX 35® is reviewed twice a year, are these facts taken into account?

10.How many securities are included or excluded in each half-yearly review?

Thanks very much

29

Web Resources

www.nyse.com

www.nasdaq.com

www.rba.co.uk/sources/stocks.htm

www.fibv.com

www.ici.org

www.morningstar.com

www.brill.com

Click to access web sitesClick to access web sitesInternet connection requiredInternet connection required

www.americanbanker.com

www.us-banker.com

www.sec.gov

www.cftc.gov/cftc/cftchome.htm

www.federalreserve.gov

www.fmcenter,org