5. REPORT OF THE MANAGING BOARD FOR THE YEAR 2003 5.3. OTHER ACTIVITIES, PARTNERSHIPS & ALLIANCES Euronext’s business model is based on straight-through processing and supported by major European post-trade services suppliers, the Group’s companies CIK and Interbolsa, on the one hand, and the Group’s partner Euroclear, on the other. Euronext has always been open to innovation-oriented partnerships. The partnerships with high-technology providers, the Group’s company GL Trade and the associate AtosEuronext have a long and successful track record. Through other partnerships, Euronext has been aiming to enter new markets, such as energy markets and bond markets. 5.3.1. Post-trade activities In order to provide its customers with a full range of services resulting in straight-through processing from listing to settlement and custody of securities, Euronext benefits from the relationship with preferred partners in post-trade activities. 5.3.1.1. Group's settlement and custody services Financial overview: the business in 2003 The comparison between 2003 and 2002 settlement and custody results should be read carefully with regard to two specific items: the accounting for Necigef activity for the first two months of 2002 and intersegment reallocations as of 2003 that impact both income and expenses. From one year to the other, CIK's settlement and custody revenues showed some good resilience at €14.8 million (-1% vs 2002), whilst Interbolsa income went up 6.5 % to €13.4 million. During the same period, operating costs went down in both entities. As a consequence, 2003 settlement and custody EBITA ended the year up to €9.3 million, that is a 31.4% EBITA margin. Introduction to business Settlement is the process by which money and securities are exchanged between the accounts of two clearing members. Once a transaction has been executed on the Euronext markets, it is cleared through LCH.Clearnet, which then transmits the settlement instructions to the organisation responsible for settlement operations in the country where the clearing member (or its settlement agent) holds an account. Transactions are currently settled through Euroclear France (resulting from the sale of Sicovam S.A. to Euroclear in 2001) or Euroclear Bank (since July 2002) for clearing members in Paris, through BXS-CIK for clearing members in Brussels, through Euroclear Netherlands for clearing members in Amsterdam and through Interbolsa for clearing members in Lisbon. Once Euronext's settlement systems have been fully integrated, every transaction done on Euronext's marketplaces will be settled through Euroclear and CRESTCo (a UK-based organisation) or another settlement agency authorised by LCH.Clearnet. CIK CIK is Euronext's wholly-owned subsidiary for the settlement and custody of securities in Belgium. It is currently diversifying its activities, developing in particular printing on request, Sicav settlement and nominative registration services. The current CIK services can be subdivided into two main activity / income pillars. Custody-related services The first pillar is the handling and safe-custody of physical securities. In order to provide this service, CIK has a highly secured and adapted infrastructure (which consists of secured vaults, a custody management system and adapted security procedures). Provided the securities are CIK-eligible, physical securities can be deposited in CIK by its affiliates. CIK guarantees the safe-guarding of the securities until they are withdrawn. These movements and positions are managed/reflected in the custody management system (CDMS(1)). The three core physical custody-related activities are consequently: deposit, safe-custody and withdrawal. CIK offers a number of additional related services, such as corporate actions, destruction of physical securities, and processing of physical coupons. Physical coupons, which are reimbursed at the bank agencies' counters, can subsequently be deposited into the CIK-Centre where they are processed by the CIK-Centre. Settlement-related activities CIK provides "engines", or systems, which enable the settlement of transactions and transfer of book positions. A distinction is made between the settlement engine for On-Exchange transactions (FMS (2)), for Over The Counter transactions (EMSS (3)) and, finally, the core CIK system (CDMS) which can be used for Free Of Payment transfers between CIK accounts (4). (1) Custody and Depository Management System. (2) Forward Market Settlement. (3) Electronic Matching and Securities Settlement. (4) Between institutions or between accounts of one institution + international transfers. New CIK services Recently, a number of CIK projects have been started which aim at developing new CIK activities and will go on being implemented in 2004. One of the most advanced projects is "Printing on Demand"; which was launched at the end of 2003 to enable the printing of securities "on request" for Investment Funds in particular, "Sicav Settlement" and "Nominative Register", which provides issuers with outsourced management of their nominative register by transforming securities from nominative to bearer form. Interbolsa Interbolsa (Sociedade Gestora de Sistemas de Liquidação e de Sistemas Centralizados de Valores Mobiliários, S.A.) is the Portuguese central custodian and is 100% owned by Euronext Lisbon. It is responsible for the custody of securities and for arranging settlement in conjunction with the Bank of Portugal. It also provides a full range of services related to securities, such as the payment of dividends, coupon clipping and the redemption of bonds. Interbolsa acts as the national coding agency for the assignment of ISINs and CFI codes. During 2003, Interbolsa was significantly involved in the migration of thr Portuguese securities market to the pan-European platforms managed by Euronext along with its three main activities, the central securities depository, the settlement of securities transactions and the National Numbering Agency. As a result of the migration of the cash market, the implementation of central counterparty and related services in the Portuguese market and the cancellation or suspension of affiliation to Interbolsa of the trading-only members, the number and value of the settlement instructions sharply decreased. At the end of 2003, the number of securities issues registered with the Central Securities Depository had increased by 5% at 1,479, representing 6,295 billion securities, with a nominal value of €111 billion. 5.3.1.2. Partnership with Euroclear Introduction Euroclear is the leading European clearing and settlement organisation. Its scope of activity consists in securities clearing and settlement, securities lending and borrowing, custody, collateral management, money transfer, and ancillary banking services. As an advocate of the horizontal integration in Europe's securities markets, Euroclear has been active during the past three years in contributing to consolidation in the industry: in 2001 with Sicovam S.A. (named Euroclear France after the merger) the French Central Securities Depository (CSD), and signature with Euronext to transfer to Euroclear the settlement activity of CIK, the Belgian CSD; in 2002 with Necigef / Niec (named Euroclear Netherlands after the merger), the Dutch CSD, and with CRESTCo, the UK settlement entity. Capital links between Euronext and Euroclear When Euroclear purchased Sicovam SA in 2001, Euronext received 1.6% of Euroclear plc (via Sicovam Holding) in exchange for its stake in Sicovam S.A.. During the same year, the two companies signed an agreement under which Euronext transferred 20% of the share capital of Clearnet to Euroclear plc in February 2002 together with all the shares of Necigef and NIEC in return for 89,694 shares in Euroclear plc. At the end of these transactions, Euronext held 4.5% of the capital of Euroclear plc (including 1.6% through its stake in Sicovam Holding). After the merger of Euroclear with CRESTCo, Euronext's stake in Euroclear was diluted and reduced to 3.6%.