3.4 RISK MANAGEMENT BASED ON THE COMPANY RISK PROFILE

Organization
Management assurance is facilitated by the Group Risk Management, which reports to the Risk Committee of the Managing Board. It provides enterprise-wide risk management and ensures a consistent and structured framework for risk management across the Group. This is based upon establishing risk profiles for each SBU. Group Risk Management works with management to develop and maintain risk profiles and ensure that residual risks are reported at the appropriate level in accordance with the risk management strategy agreed by the Risk Committee of the Managing Board. It also provides central monitoring of risks and outcomes. The residual risks categorized as high in the risk profiles, together with the management responses, are consolidated at Group level and form a Group risk profile, which is reported to the Risk Committee regularly (for further information on risk management and internal control system, see section 2.5).

Internal Audit Services provides independent assurance on the adequacy and effectiveness of the risk and control assurance framework and reports to the Audit Committee of the Supervisory Board.

GL TRADE, as a listed company, follows its own procedures for risk management and control.

Categories of risk
In its Group risk profile, Euronext has identified a number of key inherent risks which the company may face. These are categorized as follows: strategic business integration, business operations, legal and regulatory, information technology, financial and extended enterprise. Where appropriate, some of the inherent risks are covered by insurance.

Inherent risks are threats to achieving objectives due to the nature of the business's activities or the environment in which it operates, before taking account of the measures in place to manage the risks (i.e. potential or gross risk).

3.4.1 Strategic risks
3.4.1.1 Revenues closely related to market conditions
The revenues and profitability of Euronext depend on a range 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 Euronext's systems.
These factors reflect variations caused by changes in economic growth in Europe and around the world, political stability, and the regulatory environment for investment in cash and derivatives products. The diversity of Euronext's business mix puts the company in a good position to cope with the changing economic climate, due to the counter-cyclical nature of derivatives and cash products.

3.4.1.2 Competition
The consolidation of financial services and markets, the creation of new mechanisms for the electronic trading of all types of securities and the behaviour of competing exchanges mean that Euronext faces increasing competitive pressures.
Similarly, faced with from users pressure to lower fees, which strengthens the trend toward consolidation among stock exchanges, competitors could combine and gain market share.

3.4.2 Business integration risks
Integration of the cash trading and clearing platforms was completed in stages between 2001 and 2003. Following the migration of the Paris and Brussels derivatives markets to LIFFE CONNECT® in 2003, the migration of Euronext's derivatives markets in Amsterdam and Lisbon to LIFFE CONNECT® was successfully implemented in 2004. This completes the integration of trading platforms. There are therefore no inherent risks remaining with regard to integrating trading platforms.

3.4.3 Business operations risks
Euronext's cash and derivatives markets are run on electronic trading platforms and there is a dependency upon the availability, performance and reliability of those platforms. Through its approach to software and infrastructure design, development and testing, Euronext seeks to minimize any risk of service interruption. Its objective is to provide a highly reliable, resilient service. Nevertheless, it makes plans and preparations so it can deal efficiently and effectively with a major operational disruption. Euronext gives high priority to continuing to provide services to its customer base in the event of a disruption. Should an event occur that triggers the business continuity plan, Euronext's first concern will always be the well being of its staff and the wider community.

Business continuity departments work in conjunction with line managers and are responsible for the development, implementation, testing and maintenance of business continuity and emergency response plans. The starting point for business continuity planning is the business impact assessment, which involves identifying threats, probability of occurrence and the possible impact if threats become reality.
When assistance is required, efforts concentrate on maintaining customer-focused IT and business operations and the necessary support services. Priority-based recovery schedules have been established as part of the business continuity process.
Euronext has defined procedures for the recovery of core operations for its clients. These procedures are managed as an escalation of the normal serious incident procedures and are controlled and invoked as the next step of the same management escalation to ensure timely and adequate implementation under the appropriate level of business control.

The physical core of Euronext's business continuity arrangements consist of physically remote data centres, systems designed for high availability, a resilient data network and business continuity sites capable of supporting all core business operations and technical support to customers.

High priority is given to checking and testing plans.
A range of approaches is used from desktop/scenario exercises through to full-scale exercises involving IT operations and business operations.

It is vital that the markets are operated in an orderly fashion and that the integrity of those markets is not undermined. This is achieved through a combination of rules and systems and other resources used to monitor trading activity.
Besides trading-related risks, Euronext's risk management is designed to obviate any risk of an inefficient or fragmented market structure and differing rules which could jeopardize the Group's ability to offer existing, new and prospective issuers the advantages and opportunities of access to capital and liquidity. In order to enhance visibility and liquidity, the existing structure is being overhauled.
This should result in the establishment of a single set of regulations, and simplified access for younger or smaller companies through a new market, Alternext.
For Euronext's business operations, customer service is key to success. This applies to market operations, listing activities and information services in particular. Risks that may undermine customer service are managed proactively.

3.4.4 Legal and regulatory risks

The most important litigation relates to Via Net.Works. Following the initial public offering of Via Net.Works on Euronext Amsterdam and Nasdaq on 11 February 2000, Euronext Amsterdam was criticized by the media for allowing trading in shares of Via Net.Works to start before trading started on Nasdaq. Prior to the start of trading these shares on Nasdaq, trading on Euronext Amsterdam opened and closed at a price of €89 per share. After the close of trading on the Amsterdam market, trading on Nasdaq opened at a price of US $41 per share. At the start of the next trading day, Via Net.Works' price on the Amsterdam market dropped to €50 per share. The STE (now the AFM - the Netherlands Authority for Financial Markets) conducted an inquiry into the listing of Via Net.Works. In 2002, the AFM notified Euronext Amsterdam that it had decided not to fine or sanction the company in connection with this initial public offering. This decision is final.
Directly following the initial public offering, legal proceedings were instituted against the Amsterdam market by a private investor and the "Via Net.Works Foundation", claiming to represent approximately 600 investors and currently claiming compensation in respect of trading losses of approximately €11 million. The company is defending itself stongly against these claims. The private investor claim (€250,000) was rejected by the District Court of Amsterdam. An appeal has been lodged with the Court of Appeal. The Foundation claim - also pending before the Amsterdam District Court - is awaiting judgement (no date has been set).

The Group has no knowledge of any other litigation that could impact significantly its financial position, its assets, its cash flows or its results.

3.4.4.2 Regulatory risks
Euronext operates in a highly regulated sector, which is governed by a variety of laws set at both national and European level. In addition to the costs of compliance imposed on Euronext by these regulations (such as the costs of the maintaining market monitoring and surveillance systems to meet regulatory requirements), the diversity of regulatory requirements across the various Euronext marketplaces and their jurisdictions makes achieving genuinely harmonized arrangements across Euronext's markets a complex task.

All Euronext rules and initiatives with regulatory implications must be approved by the relevant authorities of each country in which Euronext operates as well as by the co-ordinating bodies set up under the Euronext regulators' memoranda of understanding. This may slow the integration and development process if certain rules are not approved by all the regulators or require some time for approval. Moreover, the decisions taken by the co-ordinating bodies are not binding on each of the participating national regulators, who need to approve them ultimately at national separatly level and may not agree to discussions or modifications approved by the co-ordinating bodies.

Furthermore, as Euronext operates in a highly regulated sector, it is exposed to the risk of changes in regulations in each of the countries in which it operates. Notwithstanding the procedures established pursuant to the Euronext regulators' memoranda of understanding, Euronext can offer no assurances that such changes to these regulations will necessarily facilitate a greater degree of harmonization between jurisdictions.

Most regulatory changes within Europe at present are related to the Financial Services Action Plan (FSAP). While welcoming and supporting actions taken towards harmonizing securities legislation at a European level, Euronext recognizes that it is too early to decide whether implementation of European Directives in this field is likely to result in the expected harmonization of national laws or create the desired level playing field across EU member states. This will depend to a great extent on consistency of implementation at national level of a number of important implementing measures, many of which still need to be finalized.

Euronext's regulators are likely to co-ordinate their FSAP implementation activities within the framework of CESR timetables and decisions, rather than independently. Given the potential room for maneouvre in the FSAP timetable, this may have a detrimental impact on the pace at which full harmonization across Euronext's markets is achieved.

3.4.5 Information technology risks
Information technology risks relate to dependence on the availability, resilience, capacity and performance of Euronext's information and communications technology with regard to meeting market demands and other business needs. Ensuring the operating environments, systems or data are not compromised is an integral part of this.

The company's business depends on the successful operation of its cash and derivatives trading platforms and all its computer and communications support systems. Today, trading is exclusively electronic. Any malfunction or breakdown is harmful, but Euronext has taken a number of steps to minimize the risk of failure, ensure the integrity and continuity of the systems, and minimize the disruption resulting from any incidents that may occur.

Furthermore, as information technology changes rapidly, the company's growth and profitability will be dependent on continuous improvements in its systems to ensure they remain competitive. These changes require ongoing capital investment in the company's information systems. Proactive risk management helps ensure successful outcomes for such investments.

3.4.6 Financial risks
As a result of its global operating and financing activities, the Group is exposed to financial risks such as changes in interest rates, changes in currency exchange rates and the risk of a counterparty defaulting. Strict policies and procedures to measure, manage, monitor and report risk exposures have been defined and are regularly reviewed by the relevant management and supervisory bodies (Risk Committee, Managing Board and/or Audit Committee, as appropriate).

The identification and daily monitoring and management of risks are performed by a central treasury and financing department in accordance with the applicable rules and procedures. When permitted by local regulations and when necessary, the Group's subsidiaries centralize their cash investments, report their risks and hedge their exposures with the Group's central treasury.

Derivatives instruments are used solely to hedge financial risks related to in the normal course of the Group's commercial activities or financial positions. The Group does not enter into derivatives contracts for speculative purposes.
Financial risks are described in greater detail in the note 4.3.6.1 to the consolidated financial statements.

3.4.6.1 Liquidity risk
Cash reserves, which structurally show a surplus, combined with investment rules that ensure very short-term liquidity for its financial assets, provide Euronext with a cash and cash equivalents' position that allows the company to repay all its financial liabilities without reverting to incoming cash flows generated by operational activities. The financial assets, liabilities and net position of Euronext are described in greater detail in chapter 4 (see note 4.3.6.1 to the consolidated financial statements).

As at 31 December 2004, the Group's main consolidated loans and borrowings were as follows.

3.4.6.2 Interest rate risk
Almost all the financial assets and liabilities of Euronext, whose exposure to interest rate risk is described in chapter 4 (see note 4.3.6.1 to the consolidated financial statements), are either based on floating rates or are based on fixed rates but mature within one year. Euronext is therefore not exposed to price risk affecting fixed-rate financial assets and liabilities.
However, the Group is exposed to cash-flow risk arising from net floating-rate positions. As the Group is a floating rate lender in euros, when euro rates decrease the Group's financing income decreases (€3.7 million per 1% decrease). Similarly, as the Group is a floating-rate borrower in sterling, when sterling rates increase the Group's financing expenses increases (€1.5 million per 1% increase).

3.4.6.3 Currency risk
As a significant part of the assets, liabilities, income and expenses of the Group is recorded in pounds sterling, the Group is exposed to a currency risk. When the euro increases in value against sterling, the contribution of equity (i.e. the balance of assets and liabilities) and income in sterling in the consolidated financial statements of the Group decreases when translated into euros.
On 31 December 2004, the Group's net currency position was £274 million and the currency exchange rate differences had a positive impact of €4.8 million on the Group's consolidated equity in 2004. More detailed explanations, including a calculation of sensitivity, is provided in chapter 4 (see note 4.3.6.1 to the consolidated financial statements).
In order to reduce its exposure to foreign exchange rate fluctuations, the Group may use derivatives for the sole purpose of hedging financial risks related to its commercial activities or financial positions.

3.4.6.4 Credit risk of financial instruments
Euronext is exposed to credit risk in the event of a counterparty defaulting. Euronext limits its exposure to credit risk by carefully selecting the counterparties with which it concludes agreements. Credit risk is monitored on the basis of exposure limits that depend on ratings assigned by rating agencies as well as the nature and maturity of transactions. Mitigation rules are described in greater detail in chapter 4 (see note 4.3.6.1 to the consolidated financial statements).

3.4.7 Extended enterprise risks
Euronext, just as most companies, does not provide the entire chain of a process itself. It therefore has to manage risks arising from dependence upon third parties and obtain assurance from them where possible. In Euronext's case, it is dependent on its corporate partners: AtosEuronext, Euroclear and LCH.Clearnet Group Ltd. AtosEuronext is Euronext's preferred external supplier of information technology and as such is responsible for developing technology for Euronext and managing its IT systems.

LCH.Clearnet Group Ltd clears all the transactions executed on Euronext's cash markets and on Euronext.liffe. Although Euronext only holds an interest in LCH.Clearnet Group Ltd, it could be affected in the event that LCH.Clearnet Group Ltd experiences problems, either through its UK clearing house or its French clearing house. The efficiency of the clearing operations provided by LCH.Clearnet S.A. to the cash markets and the continental derivatives markets comes under the Service Level Agreement concluded between the parties in the course of the fourth quarter of 2004 concerning clearing services provided by the clearing house.

Euroclear is responsible for settling all transactions concluded on Euronext's cash markets, with the current exceptions of Euronext Brussels and Euronext Lisbon. A letter of intent regarding the sale of CIK to Euroclear was signed in the last quarter of 2004. This transaction is expected to be completed in the first half of 2005. Talks have also started regarding Portugal, where settlement is currently done through Interbolsa (the Portuguese CSD and a wholly-owned subsidiary of Euronext). Although Euronext has only a minority interest in Euroclear plc, it may suffer adverse consequences if Euroclear were to encounter difficulties.
In addition, Euronext has relationships with independent software vendors (ISVs), which develop front-end systems to interface with Euronext's trading platforms. To prevent any risk of corruption to its trading systems, Euronext ensures that ISV systems conform to certain performance and resilience criteria. Euronext also promotes best practices to help ensure its customers make appropriate choices.

3.4.8 Insurance policies
The Group maintains a comprehensive insurance programme, which is intended to cover its commercial and operational risks. All the main insurance policies are consolidated at Group level in order to ensure consistency of cover across the Group and to reduce premiums through economies of scale.

The Group's policies are split into three categories:
- financial, covering directors' and officers' liability, professional indemnity, and crime;
- general, covering property, theft, material damage, business interruption, public and product liability;
- local, covering employers' responsibility with respect to workers' compensation, travel, motor vehicles and the like.
The scope of the policies is set by reference to the activities of the Group and the limits by reference to total asset values and revenues. Advice on all insurance-related matters is taken from the Group's broker's and all underwriters are appropriately analysed from a credit rating perspective.
Alongside the insurance policies there exist well-developed risk management procedures and business continuity plans.
Operational risks are minimised by having back-up facilities and IT systems in place to deal with disaster recovery requirements.