The Hedgeweek Interview: Raffaele Jerusalmi. Executive Director, Italian Exchange Markets, Borsa Italiana
Borsa Italiana (the Italian Stock Exchange) has made significant progress in winning the support of hedge funds for its growing range of products. Raffaele Jerusalmi outlines the thinking behind the Borsa's hedge funds drive.
HW: What products have you launched for the hedge funds market?
RJ: We offer the full range of exchange-traded products, from equity cash to derivatives, fixed income products, exchange traded funds, and corporate bonds.
From the hedge funds perspective, the most attractive products are the equity cash and equity derivatives products.
HW: When did you launch these products?
RJ: We started the electronic cash market in 1991, and the derivatives market was launched in 1994, so we have built up a significant track record in launching and developing these products.
HW: What derivatives products are you planning to launch this year?
RJ: We currently have 39 stock options and 19 stock futures supported by 10 market makers. Our futures products are moving to a new S&P/MIB Index in September, our first international venture that we established with Standard & Poor's to promote our market on a larger scale.
The idea was to completely change the way in which we constructed the index, using new sector classifications and international methodologies. We conducted a survey of index providers and we decided to work with S&P, largely because of their successful track record in derivatives products.
We will have a larger number of stocks in the new index, which will launch with 40 stocks. We expect the new index to create a better representation of the Italian market, hopefully adding slightly more volatility and taking into account company flotations.
HW: What is your ranking in Europe in terms of trading volume?
RJ: The turnover in our market is among the highest in Europe. Although we have a limited number of companies listed on the Italian market, we have maintained steady volumes over the last 2-3 years, with enough liquidity.
HW: Borsa Italiana's annual Hedge Fund Conference currently attracts several hundred delegates from Italy and around the world - what is the significance of this event?
RJ: We started working on hedge funds five years ago, when we had the idea that hedge funds would become the most important players on the exchange.
We decided that it was the right time to create a team headed by Valentina Sidoti dedicated to hedge funds, even though hedge funds are not direct customers.
We conducted a market survey to help us understand the opportunities within the hedge funds market. At the same time, in 1999, the Bank of Italy published the legal framework for the creation of onshore hedge funds in Italy.
So, in 2000, we decided to organise our first Italian hedge fund conference to help develop the hedge funds culture in Italy. The idea was to host an educational event that also allowed the domestic hedge fund community to meet with the main international players.
Since then, our team has visited a number of international hedge funds and we now have a huge number of contacts within the hedge fund industry that are very important to us.
The objective of our hedge fund team is two-fold:
* to promote the Italian market to the international hedge funds
* to obtain information from the key players on the evolution of the markets and the key market trends that allow us to create the right solutions for our customers in advance of our competitors, in terms of both products and strategic promotion.
A good example of the benefit of this approach is the mini futures contracts that we created in July 2000 - we were the first country in Europe to introduce a mini contract and this was an idea that we got from talking with some of the key hedge fund players.
Another idea was to invest a lot of time and effort in promoting our Italian options market to hedge funds - we have since seen very significant year-on-year growth in this area.
HW: Which hedge fund markets are you targeting and how are you targeting them?
RJ: We have concentrated mainly on the US, and more recently on the UK, Switzerland and France. We will next year extend our focus to the Far East.
We conduct mainly one-to-one meetings with single hedge fund managers, focusing on their trading style, and we outline the opportunities available to them in the Italian market. We also provide them with a number of information sources on the Italian market, because we found that lack of information was preventing them from trading the market.
We now have around 220 contacts among the largest hedge funds, providing them with easy access to our listed companies.
HW: What improvements have you made to facilitate trading by hedge funds on the Italian market?
RJ: We have introduced a number of changes to our market structure to facilitate more business from these hedge fund, for example:
* we created the CCP (Central Counterparty) for the cash market
* we also introduced anonymity in the book for the cash equity market as well - hedge funds needed and appreciated this move.
* we made the key price sensitive announcements of Italian companies available in English as well as Italian.
* we also introduced a voluntary code of corporate governance in 1999, which was revised in 2002, to increase confidence in the Italian market.
Our overall intention with all these developments is to create confidence among the international hedge fund community in the activities of our exchange, and we welcome the opportunity to develop further ideas with hedge funds.
HW: What challenges do you foresee for the exchange?
RJ: For us, one of the main challenges is the timing of our own IPO. Our shareholders would like us to undertake an IPO as soon as we can, unfortunately we have to overcome a regulatory issue. Hopefully this issue will be overcome with the next law which will create a financial services supervisory authority in Italy - this would speed up the process of our IPO.
In the meantime, we want to internationalise our market as much as we can. We can only execute this up to a certain point on a stand-alone strategy, and we are close to this point, from now on, we need to find alternative ways of growing on the international market.
HW: What are these alternatives?
RJ: All the alternatives are possible - we can partner with other exchanges, information providers etc - the evolution of the industry is very dynamic and the new EU directives will allow the creation of a number of new models in the future.
It is difficult to say which model is best right now, but my experience tells me that if we are efficient and cost-effective, we can play a significant role on a stand-alone basis.
HW: We are seeing the emergence of a new era of global alliances among the various stock exchanges - what is your position within this scenario?
RJ: We do not have any significant agreement so far with any of the other exchanges. However, we are always looking at the possibility of new partnerships. In our mind it is clear that the process of consolidation will continue in Europe over the next few years, but on the other hand, we consider ourselves extremely efficient, so we are not prepared to do a deal at any price.
We really want to find the best partnership, one that will provide real added value to our shareholders and to our intermediaries and customers in general - it is a slow process, as we have to take many things into consideration.
Meanwhile, we are maintaining the focus on our basic strategy, which is to grow and consolidate our range of products and services and build critical mass in all our markets.
HW: Would you also consider an alliance with a non-EU exchange, such as the Chicago Mercantile Exchange or similar?
RJ: Yes, we would consider any alliance that adds value to our stakeholders. However, these alliances can be difficult and sometimes painful when it comes to integration of different cultures and processes, there will be very little possibility of a quick and simple fit.
HW: There has been a lot of debate about vertical exchanges versus horizontal exchanges - what model do you have, and where do you stand on this debate?
RJ: From a static point of view, we are a vertical exchange, because we decided to integrate all the companies that are part of the value chain of an exchange.
But our philosophy and culture is that of a horizontal exchange - we feel that it doesn't really matter if you are integrated or not, it is more important to open all your services to any customer that wants to benefit from those services at the same price.
This is what we are doing with all our entities, so we are ready to offer our services for the CSD to any other exchange, and even eventually to domestic exchanges that are competing directly with us.
Our attitude is extremely open, and our view is that integrating all the companies into a single entity creates significant synergies and economies of scale, enabling us to offer significant value to all our customers - in essence, we are open to all, and we are not using this model to create protectionist barriers.
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