5. REPORT OF THE MANAGING BOARD FOR THE YEAR 2003 5.4. RISK MANAGEMENT Euronext has identified a number of key inherent risks which the company may face. These are: strategic, reputational, business integration, legal and regulatory, marketing, product and business development, information and communication technology, people, physical infrastructure, third party dependency, financial and operations risks. Inherent risks are threats to achieving objectives due to the nature of the business’s activities or the environment in which it operates, without taking account of measures in place to manage the risks (potential or gross risk). Risk management and internal audit reporting is based on the key inherent risk categories. This method of reporting enables focused management responses to inherent risks, thereby helping to minimise the level of residual risks. Subsets of key inherent risks, which could potentially impact Euronext’s financial statements are disclosed hereafter. 5.4.1. Strategic risks Revenues closely linked to market conditions The revenues and profitability of Euronext depend on a series of factors linked to trading volumes, which are determined in turn by the liquidity and volatility of the market, the amount of capital exchanged and the number of securities and derivatives traded on its systems. These factors reflect variations caused by changes in economic growth in Europe and the world in general, political stability and the regulatory environment for investment in cash products and derivatives. Euronext's diverse operations put the company in a better position to cope with the changing economic climate, due to the counter-cyclical nature of the derivatives business in relation to the cash business. Competition The consolidation of financial services and markets, the creation of new mechanisms (ECNs, ATSs, etc.) for the electronic trading of all types of securities and the increasingly aggressive behaviour of competing exchanges mean that Euronext faces increasing competitive pressures. Similarly, faced with the trend toward consolidation among stock exchanges, competitors could combine and gain market share, thus weakening Euronext's position.