SWX Group %

Transcription

1 Annual Report 2004

2 SWX Group Annual Report 2004 KEY FIGURES SWX Group % Revenue* Profit* Cash flow* Total assets* Equity* Staff numbers * In CHF 1000 SWX Swiss Exchange and virt-x % Exchange trading turnover (in CHF m) Number of transactions Number of listed securities SPI market capitalization (in CHF m) Subsidiaries % SWX Swiss Exchange (in CHF 1 000) Revenue Profit virt-x (in GBP 1 000) Revenue Profit Eurex (in EUR 1 000) Revenue Profit before operating expenses EXFEED (in CHF 1 000) Revenue Profit

3 Contents 03 Editorial 6 SWX Group SWX Group encouraging results 10 Expansion of trading platform Committed to the Swiss financial centre Extension of Eurex partnership SWX Group as an employer 12 SWX Group organizational structure 13 SWX Group business areas and markets 14 Core business SWX Group present in Switzerland and the EU 18 Benefits of the Swiss Value Chain New settlement capabilities CCP allows participants to choose New indices for the Swiss equity market 20 Healthcare Liquid issues Development of markets and services 22 Alternative access systems Markets and their developments Richer product mix in derivatives segment IBL makes its mark International bonds in ten currencies Alternative listing location for international bonds ETFs gain further ground TIF with standardized and individual evaluations Quality assurance in trading Upgraded and expanded trading platform 27 EM6.4 Quotematch Companies SWX Swiss Exchange Switzerland s securities trading hub 32 virt-x the gateway to Europe 38 EXFEED adding new data channels 41 Eurex opening up the US market 43 STOXX creating success 46 Annual financial statements 51 Annex 82 Glossary 104

4 Snapshots Many readers will recall these stock exchange scenes hectic, sometimes chaotic situations at the trading ring, the hustle and bustle, fast-changing numbers on the big ticker walls, the rush, stress and, if there was a soundtrack, a cacophony of voices and calls. At the SWX Swiss Exchange, such images belong to the past. The scene changed radically with the introduction of the electronic trading platform nearly ten years ago, and everything seems quiet and peaceful now. Bits and bytes carry the important trading data to where they are needed in a flash, including the hectic trading rooms of participating banks. Only the ticker wall in the foyer, displaying data in real time, still mirrors the pulse of the stock exchange. The images in this Annual Report show the face of the SWX Swiss Exchange as it is today. Much has changed, but its purpose remains the same: with its cash and derivatives markets, information products and admission of securities to trading, SWX is focused on promoting and strengthening the Swiss financial centre and representing its interests.

5 SWX Group Annual Report

6 Editorial The SWX Group must and will remain independent in order to help safeguard the long-term interests of the Swiss financial centre. Reto Francioni, Chairman of the Board of Directors ABACUS Wertpapier Handelsgesellschaft mbh, Köln; ABN AMRO Bank N.V. Amsterdam, Zweigniederlassung Zurich, Zurich; ABN AMRO Bank N.V. London Branch, Lon-

7 SWX Group Annual Report The SWX Group can look back on an eventful, exciting and successful year marked by important developments on the strategic front. The takeover bid that we received from Deutsche Börse did not come as a surprise, and the Board of Directors rejected it for good reasons. The SWX Group must and will remain independent in order to help safeguard the long-term interests of the Swiss financial centre. In relation to the country s size, the Swiss market with its blue chips is a heavyweight among European stock markets. Thanks to its organization model, which provides participants, issuers and stakeholders with efficient and cost-effective services, but is not geared primarily to maximizing profits, the Group is well equipped for the future against a backdrop of ongoing changes in Europe s financial landscape. The autonomy granted to SWX participants in terms of pricing enables them to benefit from reduced costs and competitive advantages in international securities trading. The Swiss Value Chain, with its vertical integration of trading, clearing and settlement, not only delivers high-quality services but also helps to protect bank client confidentiality in the long term. The SWX Group also did well on the operational front in 2004, and ended the year with a solid cash flow. All divisions, including virt-x, which was consolidated in the previous year, were in the black. The amended cooperation agreement with Eurex, which was extended by ten years in 2003, proved its worth and contributed substantially to the Group s encouraging profit figures. As in the previous year, SWX returned considerable sums to participants in the form of rebates on exchange fees during the reporting period. Independent, technologically innovative, ambitious, competent and financially sound, the SWX Group is firmly rooted in the international securities industry in Switzerland and through virt-x in London, the financial capital of Europe. A special word of thanks must go to our employees, whose professionalism and dedication help to guarantee the security and lasting quality of the Group and the Swiss financial marketplace in a closemeshed network of participants, issuers, investors, regulators, authorities and political players. I am convinced that together we are making SWX a European success story. A strict, adaptable system of rules and regulations which is designed and implemented independently by the securities exchange enhances the liquidity, transparency and efficiency of a financial centre, and is a strategic success factor. Thanks to the self-regulation concept embodied in the Stock Exchange Act, SWX is well placed to secure the international competitiveness of the Swiss financial marketplace. For specific exchange services or segments, we are convinced that cooperation models based on a win-win situation will significantly shape the consolidation process under way in Europe s securities industry. In this sense, the SWX Group does not intend to go it alone. The electronic trading platforms developed by SWX have proved their worth both nationally and internationally. In July 2004, as part of the Quotematch project, the Group decided to supplement the existing SWX infrastructure with a powerful new trading platform geared to quote-driven product segments. By introducing productivity-enhancing technologies, the Group not only helps to increase efficiency on the part of market participants but also provides a greater capability for international networking. Reto Francioni don; AIG Privat Bank AG, Zurich; Banca del Gottardo, Lugano; Bank am Bellevue, Küsnacht; BANK CIAL (SCHWEIZ), Basel; Bank Hofmann AG, Zurich; Bank Julius Bär

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9 At the end of 2004, the SWX Group had 492 people on its staff. Around 25% of them are women. SWX Group

10 SWX Group SWX GROUP ENCOURAGING RESULTS Our primary aim is not to maximize profits but to provide all market participants with the greatest possible benefits and cost-effective services. Jürg Spillmann, Head of the Group Executive Committee The SWX Group can look back on a good business year. The recovery in equity trading more than offset the decline in turnover on bond markets and sluggish derivatives trading. The consolidated income statement for the year ended 31 December 2004 shows a profit of CHF 53.3 million, which represents an increase of 25.9% on the year-earlier figure. With this gratifying performance in prospect, the Group paid back CHF 20 million of exchange fees to its participants in December. We are pleased to have been able to grant this exceptional rebate in the cash market for the second time in succession. Expansion of trading platform The role of securities exchanges has changed considerably in recent years. Whereas the order-matcher function was in the forefront at the start of electronic trading almost a decade ago, exchanges are now increasingly becoming all-round service providers in the financial markets. Market behaviour is in a state of flux, particularly as regards large multinational players, and new price models are in demand. The SWX Swiss Exchange and virt-x will therefore be introducing flexible, modular services in the years ahead to optimize the costs of tying in participants. Should other elements in the traditional value-added chain of the securities trading industry adopt different forms of networking, the SWX Group will be actively involved in shaping the changes associated with this process. The Quotematch project was launched in the year under review in order to expand system capacity. The objective is to bring in a new high-capacity transaction platform in the second half of 2005 to supplement the tried-and-tested electronic platform. Geared to quote-driven segments requiring active market making, it will deliver substantially & Co. AG, Zurich; Bank Leu AG, Zurich; Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG, Zurich; Bank Sarasin & Cie AG, Zurich; Bank Vontobel AG, Zurich; Banque

11 SWX Group Annual Report improved quoting performance compared with the existing system. After the new platform comes on stream, SWX will have a market model which is technologically superior to competing models and will enable it to increase market share and earnings, especially in the warrant segment. Furthermore, SWX will be able to explore new business opportunities and base its strategies on a state-of-the-art, expandable platform. Committed to the Swiss financial centre The SWX Group rejected a merger offer by Deutsche Börse in The Board of Directors took the view that such an amalgamation would have impaired the long-term competitiveness of the Swiss financial centre. However, the Board also made it clear that international cooperative ventures in all spheres of securities trading may be of interest to the Group, as long as they serve the financial centre. It follows that the mission of the SWX Group management is not primarily to maximize profits, but to remain focused on providing all market participants with the greatest possible benefits and cost-effective services. Together with the expansion of the service offering and the trading infrastructure, this includes the creation and full use of efficient regulatory mechanisms. Our group of companies ensures a viable and attractive capital market for participants, investors and issuers in Switzerland and abroad. It does this in close cooperation with the SIS Group and the Telekurs Group. These legally autonomous infrastructure organizations implemented full automation of trading, settlement and payment transactions in the Swiss securities industry earlier than other countries, integrating these operations into what is known as the Swiss Value Chain. In recent years, the system has also been extensively networked with foreign clearing and settlement organizations to meet the requirements of players active in crossborder securities trading. Thanks to the efficient coordination between SWX Group, SIS Group and Telekurs Group, the Swiss Value Chain has been one of the key strategic success factors for the Swiss financial centre since it was introduced almost a decade ago. This is the last time the SWX Group will be publishing annual financial statements based on Swiss GAAP ARR. The Group initiated the changeover to International Financial Reporting Standards (IFRS) in the year under review, and from 2005 onwards will be using the same accounting standards as those required for securities listings in the main segment of the SWX Swiss Exchange.* Extension of Eurex partnership In 2003, the SWX Group and Deutsche Börse extended the Eurex cooperation agreement by another ten years. Owing to the differing trends displayed by derivative markets in Switzerland and Germany, it was decided to reduce the Group s share in profits from 20% to 15% with effect from 1 January This will be reflected in the income statement for that year. * The first financial statements to comply with the IFRS are scheduled for 31 December This changeover from Swiss GAAP ARR to the new accounting standards should not entail any major differences with respect to the translation of foreign currencies, and the valuation of liquid and intangible assets and provisions. However, the valuation of pension liabilities under IAS 19, which will require the SWX Group staff pension fund to be considered as a defined benefit plan, will result in a significant change. Pension assets and liabilities have to be revalued, which accounts for the increase of CHF 6.6 million in shareholders equity at 1 January 2004, after taking account of deferred tax income taxes. Had the 2004 accounts been prepared under the IFRS, profit for the year after taxes would probably have risen by CHF 2.9 million to CHF 56.2 million. Bonhôte & Cie SA, Neuenburg; Banque Cantonale de Genève, Genf; Banque Cantonale Vaudoise, Lausanne; Banque de Dépôts et de Gestion, Lausanne; Banque

12 SWX Group SWX Group as an employer The SWX Group also abides by the highest standards in its role as an employer. Integrity, professionalism and drive are the hallmarks of its employees, who see themselves as dedicated partners in the ongoing dialogue with customers and the public at large. Thanks to its extremely well qualified staff, the Group is able to set internationally recognized standards in terms of technology and organization, and thus ensure lasting entrepreneurial success. Staff survey 2004 In order to gain a first-hand impression of the strengths and weaknesses of the SWX Group as an employer, top management commissioned a staff survey last year. Employees were asked for their opinion on matters such as leadership, corporate culture, communication, information and the working environment. The response rate was encouragingly high. The poll, which was conducted by an outside firm, showed that employees particularly like the emphasis on teamwork, task-sharing with their direct superiors as well as the further education opportunities and flexible working hours available at SWX. According to the survey, there is room for improvement in terms of interdisciplinary cooperation between teams, feedback on individual performance and career opportunities within the organization. It also emerged that staff members would recommend the SWX Group as an employer to their friends. Challenging jobs SWX offers challenging jobs with good prospects in a dynamic, international working environment. The recruiting site gives an idea of what it is like to work for the SWX Group. In addition to financial specialists, the workforce includes informaticians, lawyers, economists and people from a wide range of other occupations. At end-2004, the Group s core business (comprising the SWX Swiss Exchange, virt-x und EXFEED) employed 492 people, equivalent to 467 full-time jobs. Three apprentices begin their commercial or IT training in the core business every year. Altogether, nine apprentices were undergoing training at the end of Salary and performance Salaries at the SWX Group are performance-linked. In addition, social benefits are higher than the minimum standards required by law in areas such as accident insurance and pensions. SWX is committed to actively supporting and promoting the employability skills of its staff members. Top management is convinced that this approach benefits all concerned over the longer term, since it not only has an effect on people s readiness to accept change but also makes for greater adaptability and innovativeness. Furthermore, the exchange of employees between the sites in Switzerland and the United Kingdom helps to foster a congenial international atmosphere within the Group. Piguet & Cie SA, Yverdon-les-Bains; Banque Privée Edmond de Rothschild S.A., Genf; Banque SCS Alliance SA, Zurich; Barclays Bank Plc, London; Basler Kan-

13 SWX Group Annual Report SWX Group organizational structure The SWX Swiss Exchange Association holds all the shares of the SWX Group, which does not engage in business activities as a holding company. Members of the Association are financial intermediaries, who are also participants of the SWX Swiss Exchange. The SWX Group holds all the capital of the SWX Swiss Exchange and EXFEED AG, and a 33% stake in STOXX Limited. For its part, the SWX Swiss Exchange holds all the capital of virt-x Exchange Ltd. as well as 50% of the shares and under the terms of a voting pool agreement an interest of 20% (2004 business year) in the profits of Eurex Zürich AG. CORPORATE STRUCTURE OF THE SWX GROUP SWX Swiss Exchange Association SWX Group 100 % SWX Swiss Exchange AG 100 % EXFEED AG 100 % 33 % STOXX Limited 100 % 50% virt-x Ltd. Eurex Zürich AG Corporate structure of the SWX Group since 1 July 2003 Source: SWX Group tonalbank, Basel; Bayerische Hypo- und Vereinsbank AG, München; BNP Paribas Private Bank (Switzerland) SA, Genf; BSI SA, Lugano; BZ Bank Aktiengesellschaft,

14 SWX Group SWX Group business areas and markets As a securities exchange organization, the SWX Group primarily serves the Swiss financial marketplace. Its core business therefore focuses on the areas of admission, securities trading and market information. On top of this comes the UK-regulated cash market and the relevant market data distribution through virt-x. The core business is essentially conducted by the SWX Swiss Exchange, virt-x and EXFEED. The standardized derivatives and European indices segments are operated by Eurex und STOXX, which are partly-owned subsidiaries of the SWX Group. These companies generate a sizable portion of the Group s total profit. The interests in these companies are safeguarded by SWX representatives on their supervisory and management boards. The following chart provides an overview of core and non-core activities, as well as the companies which conduct them. CORE BUSINESS AND OTHER ACTIVITIES OF THE SWX GROUP Admission Securities trading Market information SWX Swiss Exchange Admission CH-regulated cash market Non-standard derivatives SWX market data National indices virt-x UK-regulated cash market EXFEED SWX market data virt-x market data Eurex Standardized derivatives STOXX European indices Core business Other activities Source: SWX Group Wilen; BGC International, London; Citigroup Global Markets Deutschland AG & Co. KGaA, Frankfurt; Commerzbank AG London Branch, London; Cornèr Banca SA,

15 SWX Group Annual Report Supervised by the Swiss Federal Banking Commission Equity trading on the SWX Swiss Exchange In addition to Swiss companies that want to enjoy the advantages offered by their home market, the SWX equity market is suitable for foreign companies operating in the sectors which are highly regarded in Switzerland within the context of specialized asset management and private banking. Foremost among these are financial services, technology, pharmaceuticals, biotechnology and medical technology. Because of the importance of these sectors, great attention is paid to the indices which feature their shares. Secondary listings The SWX Swiss Exchange offers trading facilities for the shares of about 130 foreign companies (at ) which are listed on another national exchange. Warrants The listing procedure for warrants (certificated derivatives) is inexpensive and swift, as it is handled by an automated web application. There were derivatives of 23 issuers listed on SWX at end-2004, ranging from plain vanilla warrants to certificates and structured products. Standardized derivatives (Eurex) Eurex is now the world s leading market for the trading and clearing of derivatives, and boasts the largest network of members around the globe. The Swiss segment of Eurex trading is overseen by the SWX Swiss Exchange. Bond market The bond market of the SWX Swiss Exchange covers the entire range of debt securities: straight bonds, zerobonds, variable-rate bonds and convertibles. Swiss franc bonds The SWX Swiss Exchange is the bourse for domestic bonds. International bonds International bonds are traded in ten currencies at the SWX Swiss Exchange; however, the largest volumes are still in euros and US dollars. ETFs ETFs (Exchange Traded Funds) are investment funds that are listed on the exchange and unlike traditional investment funds are traded permanently during exchange hours, in the same way as shares. Eurex Repo The Swiss Eurex Repo market was successfully launched in Today, around 123 participants in Switzerland and abroad operate in this liquid market. The Swiss National Bank uses Eurex Repo for purposes of money supply management. Supervised by the Financial Services Authority Swiss blue chip market Trading in SMI stocks takes place through the London-based virt-x exchange. virt-x combines Switzerland s regulatory framework for issuers with a presence in Europe s financial capital, where global investment banking players operate under the supervision of the internationally respected FSA. Pan-European blue chip market 255 European blue chips can be traded on a crossborder basis at virt-x. ETFs virt-x provides issuers with a low-cost solution for the admission of ETFs to trading in the United Kingdom. At 31 December 2004, 16 ETFs were being traded in 4 currencies at virt-x. Lugano; Coutts Bank von Ernst AG, Zurich; Crédit Agricole Indosuez (Suisse) SA, Lausanne; Crédit Agricole Cheuvreux, Courbevoie; Crédit Lyonnais (Suisse)

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17 On average, 900 cups of coffee are drunk at the SWX Swiss Exchange every day. The SV Catering & Services sold an average of 130 warm lunches per day in Core business

18 Core business SWX GROUP PRESENT IN SWITZERLAND AND THE EU The SWX Group s two trading platforms, the SWX Swiss Exchange in Switzerland and virt-x in the United Kingdom, make for a unique situation: in addition to maintaining a high profile in its domestic capital market, the Group is also present in London, Europe s foremost financial centre. Operating two exchanges in two distinct regulatory environments allows the SWX Group to pursue a border-straddling strategy. Banks and securities dealers that use the Group s facilities can conduct their trades not only in Switzerland but also on a platform incorporated in the European Union. They can choose the market that provides the best liquidity and the most appropriate regulatory framework for any given security. virt-x is able to offer its services throughout the EU; the SWX Swiss Exchange cannot do this, because Switzerland is not a member of the Union. Originally established as a joint venture with a consortium of leading investment banks, virt-x came under the full control of the SWX Group in Since then, virt-x has been largely integrated into the SWX Group s management structure. Responsibility for strategy and decision-making is centralized, and to the extent permitted by regulatory procedures both exchanges are run by a single management team. The amalgamation has resulted in an efficient allocation of resources for central services, marketing and sales, as well as for market control. Moreover, this organizational structure has enabled the SWX Group to acquire extensive experience and expertise in Europe s financial markets during recent years. This experience continues to exert an important influence on the Group s overall strategy. The core business of the SWX Group includes both the SWX Swiss Exchange and virt-x, and is conducted in differing regulatory environments. SWX is a full-service securities exchange incorporated in Switzerland and supervised by the Swiss Federal Banking Commission. virt-x, governed by British law as a Recognised Investment Exchange (RIE), is overseen by the UK Financial Services Authority (FSA). The regulatory framework for securities traded on virt-x is established by the respective national exchange. The provisions governing shares listed in Switzerland and issued by companies included in the SMI are set out in the SWX Listing Rules. The further development of EU legislation (in the form of directives on prospectuses, transparency and markets for financial instruments) has meant that SMI issuers must also submit to a new body of rules. The relevant framework conditions were drawn up during the reporting year in intensive negotiations between SWX and the Financial Services Authority (FSA). They provide for the creation of two segments for shares of SMI issuers listed in Switzerland: the EU-regulated market segment for issuers who satisfy additional disclosure requirements, and the UK exchange-regulated market segment, where the regulatory status quo is maintained. Issuers listingrelated obligations in this segment will continue to be based solely on Swiss law and the SWX Listing Rules. In order to better serve the specific interests of SWX participants and virt-x members in London, the London Member Group modelled on Switzerland s Cash Market Advisory Board was founded during the reporting year. The SWX Group also cultivates close ties in London with groups representing the common interests of financial institutions in respect of regulators, stock exchanges and clearing and settlement organizations. Meetings are held regularly with the London Investment Banking Association (LIBA) and the Association of Private Client Investment Managers and Stockbrokers (APCIMS). SA, Genf; Credit Suisse, Zurich; Credit Suisse First Boston (Europe) Ltd., London; Deutsche Bank (Schweiz) AG, Zurich; Deutsche Bank AG - Global Equity Deriv-

19 SWX Group Annual Report Benefits of the Swiss Value Chain Being present in London has made it possible to enhance the international standing of the Swiss Value Chain through tie-ins to all major market infrastructure organizations. The clearing partners of SWX and virt-x are LCH.Clearnet Ltd. (London Clearing House) and SIS x-clear AG. On the settlement front, the Group works with SIS SegaInterSettle, CrestCo, Euroclear Bank and Clearstream International. By coordinating clearing and settlement transactions between these organizations and their own trading platforms, SWX and virt-x provide cost-efficient processing for securities trades across national boundaries. What is more, the Swiss Value Chain s highly automated international network features very low error rates and, hence, minimal operating risks. The Chain is a prime example of how widely differing and in some cases competing organizations can cooperate efficiently and above all for the benefit of market participants at both the national and international levels. New settlement capabilities The SWX Swiss Exchange is increasingly offering facilities for the settlement of trades in foreign-currency instruments with another home market. This means working together with the relevant foreign organizations, and the necessary links and attendant functions for Swiss Value Chain members were further expanded in One new feature is flexibility in terms of the settlement currency: securities can now be delivered against payment in a different currency from the one in which they were traded. In these cases, an inside market exchange rate agreed with an SIS counterparty is applied. Another novelty is the introduction of three additional settlement currencies, namely the South African rand, the Japanese yen and the Danish krone. A new electronic interface between SIS SegaInterSettle and various share registers was also successfully implemented in the reporting period. The purpose of this link is to make the entry of shareholder data in company registers a largely automatic process, if the investor so wishes. virt-x members may continue to choose between the settlement services of SIS SegaInterSettle, Euroclear and CrestCo. In crossborder virt-x trades, a state-of-the-art late settlement regime was created that has further boosted the already high settlement rate. virt-x is the world s topranking exchange by this measure, with an average of over 99.95% of transactions settled on time. CCP allows participants to choose Central counterparty clearing (CCP) is compulsory at virt-x for on-order-book trading and is available as an option off the order book. The tie-in of SIS x-clear with London Clearing House allows participants to choose the clearing alternative that is best suited to the existing infrastructure from either a legal or an organizational standpoint. Cooperation between these two central counterparties was strengthened in 2004, with x-clear being designated as a Recognised Overseas Clearing House the first foreign company in the United Kingdom to have achieved this status. Since the CCP service was introduced, roughly half of all trades conducted at virt-x have been cleared between members of LCH.Clearnet Ltd. (London Clearing House) and SIS x-clear AG. atives, Frankfurt; Deutsche Bank AG London, London; Dresdner Kleinwort Wasserstein Securities Limited, London; Dreyfus Söhne & Cie AG, Banquiers, Basel;

20 Core business SWISS VALUE CHAIN Payment Settlement Clearing Trading LCH.Clearnet Ltd. Clearing members CrestCo virt-x SIS x-clear AG Clearing members SIS SegaInterSettle AG Swiss Interbank Clearing SNB/SECB SWX International Bonds Euroclear Clearstream Luxembourg Source: SWX Swiss Exchange /virt-x New indices for the Swiss stock market As part of the Listed on SWX project, the SWX stock market and its indices were scrutinized down to the last detail. The purpose of this project, which was conducted in close consultation with market participants, was to introduce structural changes and new features that would improve the SWX Swiss Exchange and make it more attractive as a listing and trading platform. The results were published in March To begin with, the SWX New Market was abolished. This led to changes in the Listing Rules that take into account the needs of young entrepreneurs. In addition to benefiting from amended requirements for market capitalization and free float, companies less than three years old may now be listed on the main market if they abide by IFRS or US GAAP accounting standards and comply with tougher disclosure obligations, such as quarterly reporting. Another move made in the wake of the Listed on SWX project was to divide the securities of all SWX-listed companies into three indices: the SPI family, the SMI family and the SXI family. This new grouping provides scope for clearer benchmarking and a broader offering of tradable indices covering different facets of the Swiss financial market. The newly created SWX Special Industry SXI family is the first benchmark of its kind, comprising Swiss and foreign companies operating in special sectors. The main criteria for the choice of sectors are the progressiveness, number and international importance of their SWX-listed representatives. The SPI EXTRA index, which made its debut on 29 April 2004, meets the needs of investors wishing to buy into Swiss small and mid-cap issues not included in the SMI bluechip universe. The index adds lustre to investments in this so-called second-liner segment, which is of great importance for Swiss companies, and serves as its benchmark. EFG Private Bank SA, Zurich; Ehinger & Armand von Ernst AG, Zurich; E*Trade Securities Ltd., London; E. Gutzwiller & Cie., Banquiers, Basel, Exane SA, Paris;

21 SWX Group Annual Report THE SWX INDEX FAMILY SPI Family SMI Family SXI Family Domestic shares (Swiss All Share Index) Shares with <20% free float Investment company index SPI LARGE SMI SMI SMI Expanded SPI SPI MID SPI SMALL SPI EXTRA SMIM SXI LIFE SCIENCES SXI Bio+Medtech Foreign shares Source: SWX Swiss Exchange/virt-x Healthcare The first two indices in the SXI family, which were introduced on 21 June 2004, feature one of Switzerland s most high-profile industries. The SXI LIFE SCIENCES index groups cover pharmaceuticals, medical technology and biotechnology, while SXI Bio+Medtech is intended as a more focused subindex. Both these benchmarks satisfy a growing need on the part of foreign investors to participate in this segment of the Swiss stock market. Liquid issues Two new indices were added to the SMI on 15 November 2004: the SMIM and the SMI Expanded TM. The SMIM represents a choice sampling of liquid mid-cap stocks, meeting a market demand for visibility below the heavyweight SMI blue chip category. The SMI and the SMIM together make up the SMI Expanded TM index, which covers about 95% of the free float in Switzerland s stock market capitalization. The SMI Expanded TM thus serves as an excellent proxy for the whole equity market and can be easily replicated. All these newly launched indices have met with considerable success. Leading securities issuers were already marketing the financial products based on the SXI and the SMIM in the months immediately following their introduction. Fortis Bank (Nederland) N.V., Frankfurt Branch, Frankfurt; Goldman, Sachs & Co. Bank, Zurich; Helvea SA, Genf; Hottinger & Cie., Banquiers, Zurich; HSBC Pri-

22 Core business Development of markets and services The wide array of products available on the virt-x and SWX trading platforms, which in addition to shares includes domestic and foreign bonds, derivative instruments and investment funds, is attracting a growing number of participants. Because the SWX Group operates two different cash markets, it can also offer individual suites of products, such as exchange-traded funds (ETFs) and international bonds, in different regulatory environments and in various currencies. During the reporting period, 18 new securities dealers opted for the SWX Group s cash markets, bringing the current number of SWX participants and virt-x members to 86 and 110 respectively. These participants and members are based in Switzerland, Austria, France, Germany, Ireland, Liechtenstein, Luxembourg, the Netherlands, Sweden, the United Kingdom and the United States, illustrating the SWX Group s international orientation. Ten of the world s 20 largest financial institutions are registered with SWX or virt-x. Alternative access systems Since May 2004, participants have not only been connected to SWX s readily available proprietary exchange interface but have also been able to log on through the internationally recognized FIX protocol. This is an economical alternative system, particularly for smaller members, although it still has a few limitations (in market making, for example). FIX has established itself in recent years as the standard data-exchange protocol in the securities industry, and is now used worldwide by several hundred financial institutions and about 30 exchanges. Seven SWX participants and virt-x members have already chosen this messaging system, as it is affordable even for smaller order volumes and is fairly simple to install. It is conceivable that proprietary access systems will be offered at lower prices in future. The FIX protocol is liable to gain wider acceptance and mature to the point where its technical limitations have been all but overcome. New ultra-light interfaces with multiple counterparties will bring stock exchange membership within the grasp of even relatively small financial institutions. They can also be used to report trades executed by associated participants. In addition to SWX participants and virt-x members, around 300 associated members are also tied in to the SWX Swiss Exchange. These are accredited Swiss securities dealers, TURNOVER BREAKDOWN BY LOCATION OF SWX PARTICIPANTS NL: 1 participant, 0.1% A: 1 participant, 0.1% F: 2 participants, 0.2% GB: 16 participants, 8.4% FL: 2 participants, 1.0% D: 6 participants, 1.8% CH: 57 participants, 88.4% Source: SWX Swiss Exchange / virt-x BREAKDOWN OF PARTICIPANTS* Active Participants SWX Swiss Exchange virt-x Total Switzerland UK Germany 6 5 France 2 5 USA 0 2 Austria 1 1 Ireland 0 1 Liechtenstein 2 0 Netherlands 1 1 Sweden 0 1 Luxembourg 1 0 Breakdown of participants at (last trading day) * See glossary p. 104 NEW MEMBERS 2004 New Participants SWX Swiss Exchange virt-x Total 2 17 UK 0 11 USA 0 2 Switzerland 0 1 France 1 2 Sweden 0 1 Luxembourg 1 0 Source: SWX Swiss Exchange /virt-x vate Bank (Suisse) S.A., Genf; Hypothekarbank Lenzburg, Lenzburg; ING BANK (Switzerland) Ltd, Genf; Instinet Europe Ltd., London; J.P. Morgan Securities Ltd.,

23 SWX Group Annual Report who place their orders with a full-fledged participant and are required to report their trades to SWX pursuant to the Stock Exchange Ordinance. A web-based reporting system was developed for this purpose as early as Markets and their developments The outlook for SWX and virt-x markets looked promising at the start of But then trading volume began to fall noticeably as indices settled into a sideways pattern. At the same time, a sustained trend towards off-market trading and internal investment solutions emerged. Bonds posted a drop in turnover, whereas derivatives registered a slightl increase. Fortunately, low trading volume was counterbalanced by an upturn in new issues. After two years with very few IP0s (Initial Public Offerings), the reporting period saw four new issuers go public at SWX. They were Basilea and Ypsomed in life sciences, Austriamicrosystems in technology and Emmi in food. The launch of industry-specific benchmarks in the life sciences field and the extension of index families in the mid-cap sector made the Swiss stock market more appealing for IP0s. After two equally slack years for new issues of debt securities, listings in this segment also grew sharply in Listings of bonds fell by 15% to 249, while those of derivatives were up 76% to Richer product mix in derivatives segment Warrants again accounted for most of the new SWX listings in the reporting year, which witnessed the launch of new warrants. Dynamic derivatives, with a so-called roll-over effect arising from either a renewal of the underlying asset or other regular adjustments, were admitted for the first time. Other novelties offered on the SWX platform in 2004 included hedge fund index certificates on composite and individual strategy indices, as well as knock-out options that automatically expire when the underlying instrument moves above or below a certain value. These options made up 6.6% of all SWX-listed products at end With innovation increasing steadily, this array of products is gaining ever greater appeal. To facilitate investor guidance, the SWX Swiss Exchange began posting information about new products on its website ( last year. WARRANTS TURNOVER BY EXCHANGE IN 2004 (2003) TRENDS IN LISTED SECURITIES* SWX Swiss Exchange 18.9% (18.5%) OMX Stockholm 1.2% (1.0%) EUWAX +Deutsche Börse 51.5% (55.2%) London Stock Exchange 0.8% (0.4%) Euronext 5.3% (6.5%) 1500 BME Spanish Exchanges 2.1% (2.2%) 1000 OMX Helsinki 0.6% (0.7%) Borsa Italiana 19.5% (15.6%) Luxemburg Stock Exchange 0.1% 500 Source: FESE 0 Swiss Equities International Equities Exchange- Traded Funds Closed End Funds Swiss Bonds Foreign Bonds Swiss Derivatives Foreign Derivatives Source: SWX Swiss Exchange / virt-x * Only SWX Swiss Exchange, securities are not listed at virt-x. London; Kepler Equities, Zurich Branch, Zurich-Altstetten; Kredietbank S.A. Luxembourgeoise, Luxembourg; La Roche & Co Banquiers, Basel; Lehman Brothers

24 Core business IBL makes its mark Since Internet-based listing (IBL) was introduced in late 2002, nearly all applications for a provisional listing of debt securities (warrants, structured products and bonds) have been sent to SWX online. The more efficient admission procedures made possible by IBL rapidly led to a considerable reduction in listing charges. Almost all the listing notices required for plain-vanilla derivatives are now published electronically on the SWX website, providing substantial cost savings for issuers. Under Admission Board Circular No. 9, the possibility of publishing notices online was extended to include all debt securities in mid-september Additional regulatory enhancements and facilities are being studied for 2005, including a further expansion of the notice function by using fully automated procedures for issuers to compile notices and for SWX to check them. Also under consideration are online publication of prospectuses and plans to integrate the submission of final listing documents into the IBL application. The introduction of a high-capacity transaction platform (see p. 28) in 2005 will step up performance and give a major boost to the Swiss warrant market. The derivatives market has already been attracting more attention since the objectives of the Quotematch project were announced, which is also reflected in the increased number of listings. With regard to admission procedures, the new high-capacity platform will fit in seamlessly with the IBL application, making it possible to trade newly admitted securities just one day after the listing application is filed. With the integration of both IBL and the new platform into its existing trading system, the SWX Swiss Exchange will set the standard for an efficient and low-cost market in exchangetraded derivatives. International bonds in ten currencies Two new trading currencies, the Danish krone and the South African rand, made their debut in the international bond segment last year. This brings to ten the number of currencies in which international bonds can be traded on the SWX Swiss Exchange. The largest volume is still handled in euros and US dollars. Two other new features were the segments for German Pfandbriefe (mortgage bonds) and Bunds (sovereign debt), which were launched in spring. Market makers in the international bond segment are ABN Amro, Credit Suisse, Kredietbank Luxembourg, Rabobank, UBS, Winterflood, Zions Bank (formerly Van der Moolen) and Zurich Cantonal Bank. Turnover in international bond trading totalled CHF 25.9 billion in 2004, marking a slight decline of 4.2% compared with the previous year. By contrast, turnover in sterlingdenominated issues was up significantly (+233%). The number of trades in these issues rose by +243% to A total of international bonds were admitted for trading on the SWX Swiss Exchange, representing an increase of 355 (16.4%). International (Europe), London; LGT Bank in Liechtenstein AG, Vaduz; Lombard Odier Darier Hentsch & Cie, Genf; Maerki Baumann & Co. AG, Zurich; Maple Bank

25 SWX Group Annual Report SWX BONDS % change previous year Turnover in CHF m International Bonds Swiss Bonds Foreign Bonds Number of Bonds Number of Listed CHF Bonds Number of International Bonds Source: SWX Swiss Exchange /virt-x Alternative listing location for international bonds A new set of additional rules governing the listing of international bonds on SWX came into force on 1 February These rules make Switzerland a compelling alternative to the European Union as a listing location. It is now possible to issue bonds under foreign law and list them on the SWX Swiss Exchange, as well as to list them on the basis of issuing programmes approved by SWX. Issues can, moreover, be incorporated by reference, meaning that mention is made in the listing prospectus of other documents and the electronic publication of the listing notice. ETF TURNOVER BY EXCHANGE IN 2004 (2003) OMX Helsinki 0.3% (0.2%) OMX Stockholm 5.5% (4.7%) SWX Swiss Exchange and virt-x 9% (7.7%) London Stock Exchange 7.6% (4.6%) Euronext 20.4% (24.8%) Source: FESE and LSE Deutsche Börse AG 51.7% (55.9%) Borsa Italiana 5.5% (2.2%) ETFs gain further ground Strong growth was registered in the ETF segment during the reporting period. New entrants included four new ishare Funds from Barclays Global Investors, EQQQ from Nasdaq, three Master Units from Lyxor Asset Management, XMTCH on SMIM from Credit Suisse Asset Management and the FRESCO B Share from UBS Fund Management. Despite the liquidation of three XMTCH sector products, the year s additions raised the total number of ETFs listed on SWX from 19 to 26, fielded by six issuers and nine bonded market makers. Another 16 ETFs, fielded by three issuers and four market makers, were admitted to listing on virt-x. GmbH, Frankfurt; Merrill Lynch Capital Markets AG, Zurich; Merrill Lynch International, London; Mirabaud & Cie, banquiers privés, Genf; Morgan Stanley & Co.

26 Core business In all, 33 ETFs were on offer in the SWX Group s two segments for these products at end They covered three bond indices and numerous equity indices based on economic sectors, countries, regions and the entire world. This product offering also represented a good cross-section of the ETF market, since the funds traded on SWX and virt-x together account for over 50% of total European ETF volume (in terms of assets under management). Turnover in these vehicles registered a gratifying increase in the reporting year, despite difficult conditions on most of the world s financial markets. The combined value of ETFs traded on SWX and virt-x rose by 26.4% to CHF 10.6 billion in SWX and virt-x held a number of ETF conferences in Lugano, Geneva and Zurich to familiarize institutional investors with these products. Over 350 institutional investors from all over Switzerland and neighbouring countries attended the gatherings, where issuers, market makers and analysts presented the latest developments in the ETF segment. TIF with standardized and individual evaluations The Transparency in the Fund Market (TIF) project has set important standards for disclosure in the investment funds industry. The reporting year saw a broader establishment and consolidation of the full TIP programme implemented in October Its central feature, a state-of-the-art online database, is highly appreciated and extensively used by customers, most of whom have now supplied the 80 different specifications required for their funds. The newly incorporated TIF administration validations and manual quality checks significantly enhanced the consistency, accuracy and freshness of the data provided in to specifications and price information relating to individual funds, the intention is to offer total volumes as a choice for detailed evaluations. By the same token, asset-related data on fund distribution in Switzerland is to be compiled for the first time ever and made available for in-depth analysis. Quality assurance in trading The SWX Swiss Exchange not only insists on high-quality standards in the operation of its trading systems, but also smooth processing and compliance with regulations and directives. Altogether, 300 people took the traders exam in Zurich and London last year. About 130 attended the preparatory courses offered by SWX. The possibility of conducting the trader exam at other venues in 2005, e.g. on participants premises, is being considered. This would make it easier for candidates who do not work in Zurich or London to qualify as licensed securities traders. In addition to traders employed by participants, associated participants and other candidates from the financial services industry, 19 financial journalists passed the examination in The journalists were allowed to attend the preparatory courses and sit for the exam free of charge, enabling them to gain a deeper insight into the complex realm of securities trading. In addition to specifications and price information, customers report volumes and movements of their funds on a monthly basis. These reports now serve as a basis for standardized and individual evaluations. The most noteworthy standardized evaluation is the fund promoters market ranking list. Since June 2004, this has been sent regularly to the Swiss Funds Association (SFA) and published in its quarterly report. Individual evaluations are mainly used to ensure data quality, and as an internal record enabling TIF administrators to monitor customer care. It is planned to extend data analysis applications further in 2005 and promote them actively in the fund market to make participants aware of them. In addition International Ltd., London; NZB Neue Zürcher Bank, Zurich; Pictet & Cie., Banquiers, Genf; Privatbank IHAG Zurich AG, Zurich; Rabobank International, Utrecht

27 SWX Group Annual Report Upgraded and expanded trading platform Release 6.4 will significantly reinforce the SWX platform s trade-processing and off-order-book trading capabilities. Chris Landis, Member of the Management Committee The SWX platform s trade-processing and off-order-book trading capabilities will be significantly reinforced when Release 6.4 comes into production at the beginning of Together with the extensions envisaged as part of the Quotematch project in the latter half of 2005, this upgrade will provide market players with a considerably enhanced and in some respects novel exchange platform. EM6.4 The most important new feature of Release 6.4 is the introduction of trade-type codes. These consist of a regulated set of individual abbreviations that participants and the exchange can combine in different ways to determine how trades are conducted and how the system operates. For example, publication of the reporting of a large block transaction can be delayed, or publication can be withheld altogether when entering a delivery order. Another application allows the flagging of transactions that are not made at the current market price, based on a prior agreement with the customer (cf. portfolio trades). Nostronostro cross-trades conducted on-exchange can also be specially marked by the system. In legitimate cases (e.g. back-to-back transactions), nostro-nostro cross-trades conducted off-exchange and marked as such will be accepted by the system and shunted ahead for clearing and settlement. However, these trades are not published and do not appear in the system. Other innovations concern off-order-book operations. Release 6.4 enables buyers as well as sellers to include quantities and prices in statements of interest and addressed offers. Moreover, statements of interest can now be sent to a single participant. New fields have also been added to the transaction function. For example, a bank transaction reference is available, along with a text field that can be used to communicate information to the counterparty in statements of interest, addressed offers and trade confirmations. Another new feature along the same lines is the optional indication of a settlement amount in off-order-book operations. In combination with the use of appropriate trade-type indicators, this makes it possible to forward a non-standard settlement amount to SIS. Branch, CB Utrecht; Rahn & Bodmer, Banquiers, Zurich; Raiffeisen Centrobank AG, Wien; Rüd, Blass & Cie AG, Bankgeschäft, Zurich; Schroder & Co Bank AG,

28 Core business Thanks to the new high-capacity transaction system, SWX will be offering its participants a vastly improved quoting performance from autumn 2005 onwards. Lee Hodgkinson, Member of the Management Committee All the new functions are available on both the Unix TX (MAPI) and Windows TS (Open XMLMAPI) application programme interfaces, as well as through the graphic user interface (TNA). The SWX FIX interface can now also support all functions compatible with the FIX protocol. Release 6.4 will enable SWX to address the needs of participants various business areas even more precisely than before. Quotematch The SWX Board of Directors approved Quotematch in August The project is designed to broaden the performance features of the trading system significantly and allow more efficient dealing by marshalling new quotes into the exchange system quickly. The products that require this market-making capability most are derivatives (in particular, warrants and structured products) as well as international bonds, index funds traded on SWX and virt-x, and pan- European blue chips traded on virt-x. The new high-capacity transaction system will be built in cooperation with the Australian company Computershare Markets Technology and be based on its X-stream platform, which is widely used throughout the world. Computershare Markets Technology is a subsidiary of Computershare Limited, which manages the accounts of over 70 million shareholders of companies in a dozen countries. Founded in Australia in 1978, Computershare now employs nearly people around the globe and is the world s No. 1 purveyor of services for the administration of shareholder registration systems and employee stock option schemes. The choice of Computershare X-stream was made after a rigorous, systematic evaluation process. Computershare X-stream is capable of significantly surpassing the required quoting performance on a proven technology platform. Moreover, thanks to its numerous functions and ample fulfilment of the operating requirements for the high-capacity system, X-stream will ensure low-risk implementation within a guaranteed time frame. Simulations carried out by SWX and Computershare have shown that the new platform will deliver a quoting performance far superior to that of the present system. As its name implies, Quotematch is designed for quoting prices and matching orders. It brings market makers together at a new interface. The price quotes bids and asks alike are binding. The price-taker interface for placing orders on the traditional SWX platform will remain unchanged. It will relay orders to Quotematch. In principle, Quotematch transactions can consist of a random combination of orders and prices. Zurich; SG Private Banking (Suisse) SA, Genf; Société Bancaire Privée S.A., Genf; Société de Bourse Lémanique, Lausanne; Société Générale, Paris La Défense;

29 SWX Group Annual Report The information and instructions needed for clearing and settlement will be sent to the SWX platform through conventional channels. Price data will be disseminated via Swiss Market Feed as hitherto, albeit in bundles. In addition, Quotematch will provide a new data-distribution system specially designed for publishing individual bid and ask prices. The current SWX trading platform, which features highly reliable straight-through processing (STP), has been in operation since It is being further developed and will continue to trade a full range of products, including SMI shares and other equities. Exchange participants that deal exclusively in these products will not be affected by Quotematch. Coming on stream in 2005 The high-capacity market model will be introduced in several stages during the second half of In order to ensure continued excellence of service as Quotematch is phased in, SWX and virt-x will also implement SMARTS, an off-the-shelf system for real-time market supervision, which is supported by Quotematch and the existing SWX platform. SWX also carried out a rigorous, systematic evaluation of SMARTS, and found this system to be the best product for ensuring the integrity of its market. What is more, SMARTS boasts comprehensive analytical functions that enable SWX to gauge the effects of changes in its marketplace on efficiency and integrity. The Australian company SMARTS has 12 national stock exchanges, four national supervisory authorities and 14 brokers in 11 countries on its client roster, making it the biggest provider of off-the-shelf market monitoring and compliance technology. NEW QUOTEMATCH CAPABILITY Separation of order flow and quote flow/price information for high-transaction markets on the basis of the SWX platform Orders (price takers) (interface unchanged) SWX platform (for high-transaction markets) Order router Trade router Order book view (orders only) Price feed (SMF) (interface unchanged) Orders and trades (interface unchanged) Quotes (market makers) (new interface) Routed orders Matched trades Quote/order trading engine Execution against best quote/order Price feed (new interface) Quote dissemination (e.g. contributor pages, web; new interface) Source: SWX Swiss Exchange /virt-x Société Générale SA London Branch, London; Société Générale, Paris, Zweigniederlassung Zurich, Zurich; swissfirst Bank AG, Zurich; Swissnetbank.com AG,

30

31 The average age of SWX Group employees is Their average length of service is 5.2 years. Companies

32 Reports from individual companies SWX SWISS EXCHANGE SWITZERLAND S SECURITIES TRADING HUB We safeguard the interests of the financial centre and ensure fair and equal treatment for all participants. Heinrich Henckel, CEO, SWX Swiss Exchange As a subsidiary of the SWX Group, the SWX Swiss Exchange aligns its business policies and operations with the overall strategy set by the Group. SWX runs the securities exchange and provides comprehensive services for its participants in the Swiss financial marketplace. In its role as an institution operating under the aegis of an association, SWX not only safeguards the interests of the financial centre but also ensures fair and equal treatment for all participants. Its areas of business include the Swiss cash market, the design and marketing of information products, and the development and operation of electronic trading platforms. The SWX Swiss Exchange also performs regulatory duties. At centre stage is the task of running the SWX trading platform for shares (Swiss and foreign), bonds (Swiss franc issues and international bonds), traditional investment funds, index-linked funds (ETFs) and non-standardized derivatives (warrants and structured products). SWX gathers and manages master data (e.g. on the capital structure and events of listed companies) and owns the SMI, SPI,SXI and SBI families of Swiss market indices, which it is further developing. It calculates these benchmarks regularly and makes them available to the financial community, together with price information, via Swiss Market Feed. The company owns and operates the platform, which is an electronic application for trading securities on the SWX Swiss Exchange and on virt-x in London. This system provides participants with a central order book, as well as trade reporting functions and interfaces to clearing and settlement organizations. SWX plays a key role in the area of self-regulation. It establishes the regulatory framework for participants trading activities and listed companies, applying appropriate supervisory measures to ensure that the regulations are observed and enforced. Zurich; Swissquote Bank, Gland; Timber Hill (Europe) AG, Zug; UBS AG, Zurich; Union Bancaire Privée, Genf; Van der Moolen Trading GmbH, Köln; Wegelin & Co.,

33 SWX Group Annual Report A breakdown of earnings in recent years reveals the extent to which the company s business model has changed. Fee income generated directly by trading volume on the SWX Swiss Exchange accounted for 6.2% of total revenue in the reporting period, compared with 48% in 2000 and 7.2% in At 45%, the share of income deriving from the stake in Eurex was still significant and showed no change over the year. Total revenue in 2004 rose by 6.3% to CHF 342 million. At , the number of trades conducted on the SWX trading platform was up 12.4% in Their aggregate value amounted to CHF billion, a decline of 5.3% compared with the year-earlier figure. Turnover in shares, at CHF 74.9 billion, was in line with the levels registered in earlier reporting periods. Derivates generated CHF 25.1 billion*, up 6%. The trend observed in previous years continued, with the number of trades on the platform increasing but the average ticket size diminishing. Turnover in the fixed income segment was lower, falling by 4.2% to CHF 25.9 billion for international bonds and by 17.1% to CHF billion for Swiss franc issues. Growth in exchange-traded funds (ETFs) was 29.7%. * Since the beginning of 2004, statistics on derivatives at the SWX Swiss Exchange have also included structured products bonds. SWX SWISS EXCHANGE EARNINGS STRUCTURE SWX SWISS EXCHANGE EXPENSE STRUCTURE 100% % % % 20% Other earnings Service level agreements Eurex derivatives trading Exchange services* SFBC fee payments Other operating expenses Depreciation and amortization Personnel expense Source: SWX Swiss Exchange Source: SWX Swiss Exchange * Comprising exchange fees, admission fees and information services Privatbankiers, St. Gallen; Winterflood Securities Limited, London; Zürcher Kantonalbank, Zurich; Aargauische Kantonalbank, Aarau; AB FIN S.A., Paradiso;

34 Reports from individual companies TRADES BY PRODUCT SEGMENT IN 2004 (2003) TURNOVER BY PRODUCT SEGEMENT IN 2004 (2003) Swiss Derivatives 15% (19%) International Bonds 6% (4%) Foreign Bonds 6% (9%) Foreign Derivatives 9% (7%) Swiss Bonds 2% (4%) Swiss Equities 20% (14%) International Equities 4% (3%) Foreign Derivatives 4% (2%) Swiss Bonds 32% (38%) Closed End Funds 1% (1%) International Equities 8% (11%) Swiss Derivatives 4% (4%) International Bonds 8% (8%) Closed End Funds 1% (1%) Exchange-Traded Funds 1% (1%) Swiss Equities 52% (44%) Exchange-Traded Funds 3% (2%) Foreign Bonds 24% (28%) Source: SWX Swiss Exchange Source: SWX Swiss Exchange TURNOVER IN EQUITY PRODUCTS (CHF M) Swiss Equities International Equities Exchange- Traded Funds Closed End Funds TURNOVER IN FIXED INCOME PRODUCTS (CHF M) Swiss Bonds Foreign Bonds International Bonds Swiss Equities International Equities Exchange-Traded Funds Closed End Funds Swiss Bonds Foreign Bonds International Bonds Source: SWX Swiss Exchange Source: SWX Swiss Exchange ABN AMRO Bank (Schweiz), Zurich; ACH - Securities SA, Genève; Adler & Co. Privatbank AG, Zurich; AKB Privatbank Zurich AG, Zurich; Alpha RHEINTAL Bank, Ber-

35 SWX Group Annual Report Going public After a lull lasting several years, IP0s made a comeback in 2004 as three companies incorporated in Switzerland and one based abroad went public on the SWX Swiss Exchange. The number of capital restructurings and capital increases was about the same as in New listings of bonds fell by 15%. Derivatives issues posted a considerable increase (up 76%) in the reporting year. IPOS 2004 Company Registered office Sector Market capitalization Basilea Pharmaceutica AG Grenzacherstrasse 487 Pharmaceuticals & Biotechnology million Postfach Basel austriamicrosystems AG Schloss Premstätten Technology, Hardware & Equipment 352 million 8141 Unterpremstätten Austria Ypsomed Holding AG Brunnmattstrasse 6 Medical Products 815 million Postfach 3401 Burgdorf Emmi AG Habsburgerstrasse 12 Food & Beverage million 6002 Lucerne A handful of companies were delisted in the reporting period. None of these delistings were due to mergers. In some cases, the companies involved were taken off the SWX roster following takeover offers or successful buyouts by the majority shareholders, giving rise to so-called squeeze-out operations. Three examples are shown below: DELISTINGS WITH SQUEEZE-OUTS IN 2004 Company Last listed date SAICP AG Centerpulse AG Absolute Invest AG New segmentation concept for Swiss equities The Listed on SWX segmentation concept drawn up for the stock market in 2003 was implemented in the reporting period. Following its introduction, the SWX New Market was abolished and the Listing Rules were amended to allow for the needs of fledgling companies wishing to go public on SWX. The familiar SMI and SPI benchmarks were given a facelift, and a new index family, the SXI, was also launched. The total number of SWX participants remained stable in At year-end, 86 participants were trading on the SWX platform, 57 of which have their registered office in Switzerland. Another 16 are headquartered in the United Kingdom, 6 in Germany and 7 in other countries. neck; Amas Bank (Schweiz) AG, Zurich; Amtsersparniskasse Schwarzenburg, Schwarzenburg; Amtsersparniskasse Thun, Thun; Anglo Irish Bank (Suisse) SA,

36 Reports from individual companies Regulatory standards of the SWX Swiss Exchange Striking the right balance and determining the most efficient level of regulation is the job of SWX s rule-setting bodies. Daniel Keist, Member of the Management Committee Switzerland s legislators conferred the power of self-regulation on SWX in the Stock Exchange Act. In exercising this power, SWX is also duty-bound to observe recognized international standards in connection with the supervision of market activities. Accordingly, its regulatory strategy takes account of the International Financial Reporting Standards (IFRS), as well as principles endorsed by the International Organization of Securities Commissions (IOSCO) and financial regulators of the EU and other major securities markets, such as the UK and the US. As a marketplace, the SWX Swiss Exchange has a vested interest in maintaining high regulatory standards. Striking the right balance and determining the most efficient level of regulation is the job of SWX s rule-setting bodies. The regulations they draw up are submitted to the Swiss Federal Banking Commission (SFBC) for approval. For example, the recently introduced Directive on Disclosure of Management Transactions was adopted by the SWX Admission Board in October 2003 and received SFBC approval in August The advantages of self-regulation include the speed with which SWX can respond to new needs and the ability to bring together recognized and experienced practitioners in the rule-setting bodies. Finely honed professional skills, long-standing experience, closeness to the market and familiarity with the needs of investors, issuers and exchange participants make it possible to find pragmatic, cost-effective solutions consonant with internationally recognized standards. Laying down rules also means enforcing them, and SWX has set up two major supervisory units for this purpose. One is the Surveillance & Enforcement Office (SVE); the other is the Office of the Admission Board, with its Listings and Disclosure departments. If market participants are found to be in breach of the SWX rules, either SVE or the Disclosure department launches an investigation and, where appropriate, submits an application for disciplinary measures to the proper sanctions body. Details of the rulings and practice of these bodies are published on the SWX website. Improved financial reporting Together with the tougher enforcement procedures applied by the SWX Swiss Exchange since end-2002, Genève; Anker Bank, Zurich; Appenzeller Kantonalbank, Appenzell; Arab Bank (Switzerland) Ltd., Zurich; Arbinter-Omnivalor SA, Genève; Arbitrium Finanz AG,

37 SWX Group Annual Report increased efforts by issuers to improve their financial reporting have also resulted in a generally higher level of transparency. This was ascertained by SWX in its reviews of 2003 annual reports. Despite more rigorous enforcement efforts, fewer sanctions are being imposed. Disciplinary action was taken in only 4 cases during the reporting period (compared with 13 cases in 2003). Three of these (against 11 the previous year) were published. Publication of sanctions has been the general rule since end-2002, as SWX is convinced that this encourages prevention and strengthens confidence in self-regulation considerably. In 2005, many issuers will adopt new accounting principles for their annual financial statements by switching from Swiss GAAP ARR to IFRS. In the midst of this changeover, SWX intends to maintain its rigorous efforts to enforce compliance with financial reporting standards. Where necessary, it will adapt its policy to changes in reporting requirements. Based on the enforcement options available, SWX decided in 2004 that in future it would monitor issuers corporate governance reports itself, i.e. without bringing in the auditors. In the course of its monitoring activities in this field, sanctions were imposed in one case last year. Ad hoc publicity In recent years, the SWX Swiss Exchange has gone to great lengths to ensure that issuers comply with the rules on ad hoc publicity. This led to numerous investigations and the imposition of one legally binding sanction in At the same time, issuers made substantial efforts to abide by the provisions governing ad hoc publicity, and the number of patent, gross violations of the Listing Rules is tending to decline accordingly. Nine investigations were conducted and one decision was published on the SWX website in the reporting year. ACCOUNTING AND REPORTING STANDARDS IFRS (IAS) Swiss GAAP ARR Banks (RRV-EBK) US-GAAP Other 1 2 Total* * = Total primary-listed shares at SWX Source: SWX Group Figures for 2004 were not available as we went to press, because listed companies have up to the end of June 2005 (six months from the balance sheet date) to publish their annual reports. The revised version of Article 72 of the Listing Rules will enter into force on 1 July 2005, together with the new directive on ad hoc publicity. The purpose of this revision is to streamline the existing provisions and enshrine the practice that has been established in recent years. The Internet has created new ways to provide all market participants with quick access to potentially price-sensitive facts. Under the new regulations, all interested parties are to receive timely information about potentially pricesensitive developments free of charge from the issuer s e- mail dispatcher. Moreover, every published notification is to be simultaneously posted on the issuer s website. New regulations As part of the Listed on SWX project, the SWX Swiss Exchange implemented a partial resegmentation of Swiss equities in close cooperation with market participants on 1 April The modified structure gave rise to adjustments at the regulatory level and in the composition of market indices, reflecting new trends and a desire to enhance the appeal of the Swiss stock market. The new directive on the filing of listing applications came into effect on 1 January Approval of applicants will no longer be based on submission of a minimum number of listing applications, but rather on proof of the required professional knowledge. In the fixed income segment, a set of additional rules for bond listing was issued last year. The provisions were adapted to new market requirements where it was deemed necessary and reasonable to do so. In particular, SWX expects its updated listing regulations to pave the way for more frequent admissions of international bonds. Zurich; Archelon Suisse GmbH, Zug; ARVEST Privatbank AG, Pfäffikon SZ; Arzi Bank AG, Zurich; Aston Bond SA, Lugano; ATAG Asset Management AG, Bern; Atlantic

38 Reports from individual companies VIRT-X THE GATEWAY TO EUROPE Our presence in Europe s most important financial market puts us in close proximity to the major global players, and at the same time we benefit from the Swiss listing environment familiar to SMI issuers. Peter Keller, CEO, virt-x virt-x is Switzerland s EU trading hub. Its strengths are the SWX listing environment for SMI blue chips and proximity to big European dealers, who prefer operating out of London. virt-x operated profitably in the reporting period. Trading turnover on the virt-x platform totalled CHF 906 billion (GBP billion) in 2004, compared with CHF billion (GBP billion) the previous year. The number of transactions remained stable at 10.2 million. This means that the average ticket size grew from CHF (GBP ) in 2003 to CHF (GBP in 2004) marking a 16% increase that was mainly attributable to better trading conditions in the first half of the period. The ratio of orders to actual trades showed little change. The revenue generated by on-order-book business accounted for 69% of overall turnover, compared with 72% in Thanks to increased market activity, 2004 earnings excluding unused Limited Recourse Facilities* rose to GBP 39.1 million from GBP 37.9 million in Income from unused LRFAs declined from GBP 1.4 million to GBP 0.5 million in the reporting year. TRADES BY PRODUCT SEGMENT IN 2004 Swiss Equities 92.7% Exchange-Traded Funds 0.1% International Equities 7.2 % * When virt-x was launched, the members of TP Group signed so-called Limited Recourse Facility Arrangements (LRFAs) requiring the advance payment of trading fees that accrue to virt-x if they cannot be used to offset actual business conducted by the companies concerned. All these arrangements lapsed in May Source: virt-x Vermögensverwaltungsbank AG, Zurich; Atlas Capital SA, Genève; Bâloise Bank SoBa, Solothurn; Banca Aletti & Cie (Suisse) SA, Lugano; Banca Arner SA, Lugano;

39 SWX Group Annual Report TURNOVER BREAKDOWN ON VIRT-X BY SEGMENT NUMBER OF TRADES ON VIRT-X BY SEGMENT Swiss Equities Swiss Equities Pan-European Equities ETFs Pan-European Equities ETFs Turnover in CHF m Swiss Equities Pan-European Equities ETFs Trades Swiss Equities Pan-European Equities ETFs Source: virt-x Source: virt-x Company strategy virt-x was founded by the SWX Swiss Exchange and TP Group in 2001, with a view to setting up a successful pan-european securities trading service. The exchange then put in place most of the infrastructure required for cost-effective crossborder operations, but demand for foreign blue chips did not come up to expectations. At present, the chances of winning a bigger slice of the European blue chip market in the medium term are regarded as slim. But virt-x nevertheless continues to provide a pan-european trading service, as the revenue it generates covers the exchange s low operating costs and the product offering meets a need among market participants. Meanwhile, virt-x has been studying other possible areas of operation and has identified some promising business models as part of a niche strategy. It is setting its sights on new market opportunities and exploiting its regulatory expertise. Last year, for example, virt-x set up reporting facilities for London s financial community. The exchange will continue to keep a watchful eye on new developments in European securities trading, and play an active part in shaping them by offering a range of innovative services. Regulatory framework conditions With the consent of the UK Financial Services Authority (FSA), virt-x further expanded and enhanced its service offering in Two major new features were an extended CCP (central counterparty) capability that can now accommodate UK and Irish securities, and the introduction of a trade reporting service. Furthermore, proposals to upgrade the SWX trading platform, e.g. by bringing in a delayed reporting function, were drawn up in cooperation with virt-x members. Banca Commerciale Lugano SA, Lugano; Banca del Ceresio SA, Lugano; Banca del Sempione, Lugano; Banca dello Stato del Cantone Ticino, Bellinzona; Banca di

40 Reports from individual companies The FSA, which regularly audits risks at the securities exchanges it oversees, carried out an inspection at virt-x during the reporting period. An FSA reservation calling for the introduction of a stop trading option during closing auctions was subsequently withdrawn after discussions with market participants. No adjustments had to be made to the existing functions and trading rules. Finally, talks were held with the FSA regarding the effects of various directives issued by the European Union, including those on prospectuses, transparency and markets in financial instruments (the so-called MiFID). The talks provided virt-x with valuable hints on how to adapt its strategy to EU legislation. As part of its work in setting general standards for Recognised Investment Exchanges (RIEs), the FSA audited monitoring and other procedures for the detection of insider trading and market abuse in late 2003 and early It also reviewed virt-x s corporate governance provisions. No changes were required as a result of the audit. VIRT-X OFF-ORDER-BOOK BUSINESS Number of trades Source: virt-x Non-Europe European Titles excl. Eurozone and UK Eurozone United Kingdom Credito e Commercio SA, Lugano; Banca Euromobiliare (Suisse) SA, Lugano; Banca GESFID, Lugano; Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA,

41 SWX Group Annual Report EXFEED ADDING NEW DATA CHANNELS In connection with the Quotematch project, EXFEED will offer its customers an additional, high-frequency data channel that can marshal several thousand quote updates per second at peak capacity and send them to end-users. Werner Bürki, CEO, EXFEED Business in the price data segment picked up considerably during the first quarter of 2004, with Internet e-trading portals largely contributing to the comeback. Owing to low market volatility throughout much of the rest of the year, however, the uptrend did not last. EXFEED served a total of 130 customers last year. Most of these were vendors (who sell data acquired from EXFEED further down the line) and e-trading portals. Fourteen data vendors operated one or more direct connections with the company s realtime ticker plant during the reporting period. All the other customers were subvendors, who received EXFEED data from a vendor with a direct connection. Among the biggest purchasers of EXFEED realtime data, a decline was seen in the number of level-1 1 customers due to cost-cutting measures affecting end-users. Fortunately, the number of level-2 2 customers (with access to depth-10 market information) continued to grow in Based on surveys, we can assume that the consolidation process in the financial data segment is now over. 1 Level-1 (inside-market) data include the best bid and ask and the last trade price for each security, with time and trade size. 2 Level-2 (depth-10) data include the inside-market data plus the next nine bid and ask prices for each security. All this information the 10 best bids/asks, last trade price, time and trade size for all securities is contained in the aggregate order book. Better results than in previous year Connection fees, which consist of technical tie-in costs and the flat fees paid by vendors for data distribution licences, rose by 47.6% to CHF This encouraging increase is explained by the first-ever sale of TIF data (non-listed investment funds), generating revenue of CHF Another factor was the use of additional backup connections by a number of customers during the migration from the X.25 to the TCP/IP feed. User-dependent exchange fees rose by CHF to CHF 15.5 million. The total number of users in the professional segment declined from in 2003 to in the reporting year. Total revenue was up 11.7% to CHF 18.7 million. Operating expenses grew by 2.5% to CHF 8.5 million, with two projects completed in the reporting period accounting for the entire increase: the TCP/IP migration and web-based client end-user reporting. Basic operating costs actually fell again slightly. Operating profit before licence fees and taxes totalled CHF 10.1 million, as against CHF 8.4 million in Net earnings after licence fees and taxes Lugano; Banca Popolare di Sondrio (Suisse), Lugano; Banca Privata Edmond de Rothschild Lugano SA, Lugano; Banca Unione di Credito (BUC), Lugano; Banco San-

42 Reports from individual companies OVERVIEW OF RESULTS Revenue CHF 18.7 million (+11.7%) Operating Expenses CHF 8.5 million (+2.5%) Operating Profit CHF 10.1 million (+20.9%) Net Earnings After licence Fees and Taxes CHF 1.2 million amounted to CHF 1.2 million, compared with a year-earlier figure of CHF The programming and other preparatory work for delivery of SMF (Swiss Market Feed) and PEX-MF (Pan-European Exchange Market Feed) realtime data according to the TCP/IP standard had been completed by end A major focus of EXFEED s operations throughout 2004 was to ensure uninterrupted service during the migration to TCP/IP. Gearing up for the new system also required a complete overhaul of the telecommunications infrastructure between the company and its customers around the globe. They were frequently consulted in connection with the migration, which was implemented with no snags of any consequence in August This project has laid the necessary technological foundations for the significant enhancements of data throughput that will be necessary in the years ahead. Adapting to higher trading capacity on SWX and virt-x EXFEED s efforts in the latter half of 2004 were directed at making the adjustments required to handle the data flows generated by the extensions to the SWX and virt-x trading platforms. As a first step (EM6.4), trade-type codes and off-order-book functions were expanded and additional information was made available on the operating systems. From the beginning of 2005, this additional information content was also offered to EXFEED data flow users. The next stage of the upgrade is aimed at significantly boosting trading capacity in quote-driven product segments. Responding to the new market-making functions and substantially higher quoting capacity resulting from the Quotematch project, EXFEED will offer its customers an additional, high-frequency data channel. In its final version, this new facility will marshal up to several thousand quote updates per second at peak capacity and send them to end-users. AVERAGE SHARE OF MAJOR VENDORS IN PROFESSIONAL SEGMENT IN 2004 Other 6.8% Fides 1.5% Telekurs 20.4% Moneyline Telerate 1.2% Reuters 39.0% Infotec 1.5% Bloomberg 29.6% INCOME IN 2004 Exchange fees Internet nonprofessional, 16.3% Exchange fees professional segment level % Exchange fees professional segment level % Connection fees vendors and sub-vendors 16.1% Handheld devices/ phone services 0.3% Source: EXFEED Source: EXFEED tander Central Hispano (Suisse) S.A., Genève; Bank CA St. Gallen, St. Gallen; Bank Coop AG, Basel; Bank EEK, Bern; Bank Frey & Co. AG, Zurich; Bank für Tirol

43 SWX Group Annual Report EUREX OPENING UP THE US MARKET The reporting year for Eurex, a company in which the SWX Swiss Exchange has a shareholding of 50%, was marked by two major strategic initiatives: Eurex US and Global Clearing Link. The new US operation was fully implemented, and the first stage of the new clearing facility was completed. Eurex strengthened its leadership position in its core business of European derivatives trading and extended its lead in other segments. Although the volume of trading in individual index contracts was down slightly owing to macroeconomic conditions, open positions chalked up a new record. Eurex US commenced operations on 8 February 2004 as a fully electronic US exchange for futures and options on futures. Over a hundred members were provided with equal and economical access to trading in US Treasury futures and options on futures via Eurex s proven business model. During the reporting period, preparations were made to introduce derivatives on the Russell index family and launch other innovative products. A promotional programme initiated in July led to a pickup in trading activity and a higher level of open interest. Eurex US registered its busiest week of the year in October, with contracts traded. EUREX TRADING VOLUME % (% = growth ) + 26 % + 38 % + 13% + 32 % + 48 % Millions of traded contracts Other products Euro Bund futures Euro Bobl futures Euro Schatz futures Equity index products Equity options Unique clearing facility The Global Clearing Link creates the first-ever connection between a derivatives clearing house in Europe and one in North America. As a first step, following approval by the US Commodity Futures Trading Commission (CFTC), members of the Clearing Corporation were offered processing services for trades in certain Eurex products in October In a second stage, again subject to CFTC approval, Eurex Clearing members will be able to clear Eurex US transactions in US dollars in the course of Trading in selected Eurex benchmark contracts will in principle also be possible on Eurex US outside European exchange hours, making this service available 23 hours a day. Trading and clearing forward contracts on German government debt, which accounts for over 50% of overall trading volume, remained Eurex s core business in the reporting year. The open position in this fixed income derivatives segment exceeded 4.6 million contracts for the first time in October 2004, a clear indicator of solid growth. New records were also set for the open position in euro Bund futures and in options on euro Bund futures, which totalled 1.4 million and 1 million contracts respectively. On aggregate, the number of open contracts on the Eurex exchange rose by 35% in In addition to the 28% increase in fixed income derivatives, equity index contracts (26% of total volume) were up 27% and equity options (20% of the total) up 40%. Source: Eurex und Vorarlberg Aktiengesellschaft, Staad; Bank Hapoalim (Schweiz) AG, Zurich; Bank Hugo Kahn & Co. AG, Zurich; Bank im Thal, Balsthal; Clientis Bank Huttwil,

44 Reports from individual companies As a result of the higher volume of European equity options traded in the reporting period, Eurex was able to further diversify its business mix and consolidate its leadership position in European equity-based derivatives. The growing popularity of options on Dutch securities was particularly encouraging: daily trading volume averaged contracts, bringing Eurex s market share to some 15%. Moreover, a typical feature of the Dutch segment is the large number of active traders and an even balance between nostro trading and customer business. over 100 national and international participants has risen tenfold in the first five years of its existence, from CHF 2.9 billion in 1999 to CHF 29 billion in Together with the repo operations of the Swiss National Bank, an intraday peak of over CHF 70 billion was reached in June 2004, attesting to the growing importance of secured financing in Europe. Eurex is one of the world s leading electronic exchanges for bond trading. Turnover on this platform amounted to EUR billion in 2004 (single counting), with average daily volume rising to EUR 549 million. Four new banks joined the Eurex Bonds trading platform in 2004, bringing the total number of members to 31 (including Deutsche Finanzagentur and the Bundesbank). Eurex has its own clearing and settlement organization, Eurex Clearing AG, which acts as central counterparty for buyers and sellers. This service is used by market participants of both Eurex Bonds and Eurex Repo. Volume outstanding on the Swiss franc interbank repo market with NUMBER OF EUREX MEMBERS Source: Eurex SWISS FRANC REPO MARKET, 2003/2004 Average volume outstanding (CHF bn) 80 EURO REPO MARKET, 2003/2004 Average volume outstanding (EUR bn) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Eurex Source: Eurex Huttwil; Bank in Zuzwil, Zuzwil; Banque Jacob Safra (Suisse) SA, Genève; Bank Jura Laufen, Laufen; Bank Leerau, Kirchleerau; Bank Leumi le-israel (Schweiz),

45 SWX Group Annual Report Eurex Repo Eurex Repo operates two international markets for sale and repurchase agreements, featuring fully automatic settlement facilities. The Swiss franc repo market is tied in with SIS SegaInterSettle AG. The euro repo market is served by the central counterparty Eurex Clearing AG, itself linked to Clearstream Banking and Euroclear. One of Eurex Repo s specialities is its auction function, which enables leading financial institutions to hold proprietary auctions for their financial products. The Swiss National Bank continues to use this function on behalf of the Federal Finance Administration for new and supplemental issues of Swiss government bonds and money market book claims. SNB uses Eurex Repo to control money supply Driven by strong growth on the interbank market, volume outstanding on the Swiss franc repo market rose to over CHF 70 billion in The Swiss National Bank (SNB) acted as counterparty in about 50% of the transactions conducted in Swiss francs via Eurex Repo. The SNB implements its monetary policy by means of repo auctions, which are usually held daily. The SNB s repo activities allow banks to control their short-term cash positions. lntraday repo trading provides sufficient Swiss franc liquidity for the SIC payments system, thereby ensuring a smooth flow of money transfers. Volume outstanding on the euro repo market rose to a new high-water mark of over EUR 23 billion in the reporting period. The admission of another 8 financial institutions in 2004 brought the total number of members to 36 (compared with 8 when this market was inaugurated in 2001). Bright outlook The introduction of the Basel II guidelines at end-2006 is drawing closer. This will have repercussions on the repo segment, since banks will increasingly replace traditional, unsecured money market operations with repurchase agreements in order to lower the cost of meeting tougher capital adequacy requirements. Eurex Repo plans to step up its international marketing efforts and promote two products in 2005 that are already up and running: Eurex SecLend for international securities lending and borrowing business, and Euro GC Pooling for procurement of secured crossborder euro liquidity. It expects these moves to provide further impetus to growth, with positive effects on its core business as well. Given its market-oriented initiatives and close cooperation with business partners and regulatory bodies alike, Eurex Repo is on track to become Europe s leading purveyor of secured financing services. Zurich; Bank Linth, Uznach; Bank Morgan Stanley AG, Zurich; Bank of New York - Inter Maritime Bank, Geneva, Genève; Bank Sparhafen Zurich, Zurich; Bank Thur,

46 Reports from individual companies STOXX CREATING SUCCESS 2004 was an eventful year for STOXX Ltd. After a change of management and a strategic realignment, the company is now heading towards calmer waters on the home front. A greater emphasis on the globally integrated DJ STOXX index is part of this new approach. Consequently, STOXX Ltd. and Dow Jones Indexes are working more closely together than before, in order to exploit potential operational synergies and offer customers a comprehensive portfolio of indices from a single provider. Market developments and customer needs Demands of markets and customers alike have changed. These changes affect not only the scope of the index family but also the company s services and product offering. For STOXX, this means extending the leadership position of the DJ EURO STOXX 50 to new indices and asset classes. By adopting the concept of one-stop shopping, the aim is to offer a complete, globally integrated and methodically consistent index family, as well as all related services, from a single source. Customers have more alternatives to choose from and, hence, more value for their licensing fees. Index developments To meet the requirements of global investing, STOXX last year extended its index family in two directions. The first of these was geographical, adding coverage of stock markets outside western Europe. The second was industryoriented and featured a new sector classification in cooperation with Dow Jones Indexes and FTSE. The launch of the Dow Jones STOXX Global 1800 took STOXX beyond the borders of Europe for the first time. Based on the DJ STOXX 600 concept, this new addition to the index family provides regional and sector coverage of North America and Asia. Customers can use it to complete their existing portfolios built on the DJ STOXX 600. With the DJ STOXX EU Enlarged indices, the family s reach was extended to include the new members of the European Union with a view to capturing investment opportunities on their emerging markets. The blue chip Dow Jones STOXX EU Enlarged 15 index was designed as the Dow Jones EURO STOXX 50 of the enlarged EU, allying the STOXX brand name and the proven DJ Global Titans 50 methodology. ASSETS UNDER MANAGEMENT OF EUROPEAN ETF BY UNDERLYING INDEX in m DJ EURO STOXX 50 Source: STOXX Ltd. CAC SMI DAX FTSE 100 MSCI Euro DJ STOXX 50 MSCI Pan Europe S&P 500 S&P Europe 350 Ebnat-Kappel; Banque Amas (Suisse) S.A., Genève; Banque Audi (Suisse) SA, Genève; Banque Banorient (Suisse), Genève; Banque Baring Brothers (Suisse) S.A.,

47 SWX Group Annual Report In a joint venture with Dow Jones Indexes and FTSE, STOXX incorporated the ICB classification of economic sectors in all the DJ STOXX indices. The aim of this move is to create an industry-wide standard in direct competition with the sector breakdown marketed jointly by MSCI and S&P. The ICB classification has already gained wide acceptance in the short time since it was introduced. The DJ EURO STOXX Size and Style indices were licensed in the reporting year, marking the first time such benchmarks have been accredited in Europe for exchange-traded funds (ETFs). Although sector products enjoyed the highest growth rates in terms of trading volume and assets under management last year, the DJ EURO STOXX 50 is still the market s favourite. STOXX boasts a market share of nearly 40% in the ETF segment and has a commanding lead over all other index providers in Europe. Based on open interest in index derivatives, the DJ EURO STOXX 50 further consolidated its dominant position in Its futures now have a market share of around 30% (or EUR 50 billion) and its options one of 50% (EUR 430 billion). Both these classes of DJ EURO STOXX 50 derivatives rank second worldwide. STOXX had 336 licensees in 31 countries at end For the first time, it acquired new international customers in Chile, Israel, Malaysia and Mexico. OPEN INTEREST ON DJ EURO STOXX 50 DERIVATIVES in bn January 2004 February 2004 March 2004 April 2004 May 2004 June 2004 July 2004 August 2004 September 2004 October 2004 November 2004 December 2004 DJ EURO STOXX 50 Futures Source: Eurex DJ EURO STOXX 50 Options TOP-8 EUROPEAN ETF BY ASSETS UNDER MANAGEMENT in m DJ EURO STOXX 50 Master Unit ishares DJ EURO STOXX 50 CAC 40 Master Unit DJ EURO STOXX 50 EX XMTCH on SMI DAX EX ishares FTSE 100 SMTCH on MSCI Euro ishares S&P 500 SPDR Europe 350 Source: STOXX Ltd. Genève; Banque Bauer (Suisse) SA, Genève; Banque Bénédict Hentsch & Cie SA, Genève; Banque Cantonale de Fribourg, Fribourg; Banque Cantonale du Jura,

48

49 A total of customers, visitors and guests attended 845 events at ConventionPoint in Annual financial statements

50 Porrentruy; Banque Cantonale du Valais, Sion; Banque Cantonale Neuchâteloise, Neuchâtel; Banque de Commerce et de Placements SA, Genève; Banque de Ges-

51 Contents 51 Consolidated annual financial statements for 2004 Consolidated balance sheet 52 Consolidated income statement 53 Consolidated cash flow statement 54 Notes to the consolidated annual financial statements 1 Summary of significant accounting policies 56 2 Scope of consolidation 57 3 Changes in scope of consolidation 57 4 Cash and marketable securities 58 5 Accounts receivable 58 6 Prepaid expenses and accrued income 59 7 Summary of fixed assets 59 8 Investments in subsidiaries 60 9 Summary of intangible assets Other liabilities Accrued expenses and deferred income Provisions Changes in equity Segment data Personnel expense Other operating expenses Financial income Other expense/revenue Taxes Off-balance-sheet transactions Pending transactions Post-balance-sheet events Related parties Staff pension fund 69 Report of the group auditors 70 Annual financial statements of the SWX Group, Zurich (company financial statements) Balance sheet 72 Income statement 74 Notes to the annual financial statements 75 Proposal of the Board of Directors 76 Report of the statutory auditors 78 tion Financière, Zurich; Banque de la Méditerranée (Suisse) SA, Genève; Banque de Patrimoines Privés Genève BPG SA, Genève; Banque Degroof (Suisse) SA,

52 CONSOLIDATED BALANCE SHEET in CHF Note ASSETS Cash Marketable securities Total cash and marketable securities Accounts receivable Deferred tax assets Prepaid expenses and accrued income Total current assets Fixed assets Investments in subsidiaries Intangible assets Total non-current assets TOTAL ASSETS LIABILITIES AND EQUITY Other liabilities Accrued expenses and deferred income Total short-term liabilities Deferred tax liabilities Provisions Total long-term liabilities Total liabilities Share capital Capital reserve Foreign currency earnings (255) (459) Retained earnings Total equity TOTAL LIABILITIES AND EQUITY Succursale de Genève, Genève; Banque Diamantaire (Suisse), Genève; Banque Franck, Galland & Cie SA, Genève; Banque Galland & Cie SA, Lausanne; Banque IPPA

53 Consolidated annual financial statements for CONSOLIDATED INCOME STATEMENT in CHF Note INCOME STATEMENT Revenue Personnel expense 15 (92 404) (88 990) Depreciation and amortization of fixed and intangible assets 7/ 9 (31 231) (75 918) Other operating expenses 16 ( ) ( ) Operating income Net financial income 17 (6 608) Other expense/revenue 18 (2 694) Profit before taxes Taxes 19 (14 463) (14 482) PROFIT FOR THE YEAR & Associés, Luxembourg, Succursale de Lausanne, Lausanne; Banque Jenni & Cie. SA, Basel; Banque MeesPierson BGL SA, Nyon; Banque Pasche S.A., Genève;

54 CONSOLIDATED CASH FLOW STATEMENT in CHF CASH FLOW STATEMENT Profit for the year Depreciation and amortization of fixed and intangible assets Decrease (increase) in provisions (15 448) (8 275) Reclassification of tax provisions Deferred income taxes (953) Income from non-consolidated holdings (887) Cash flow Decrease (increase) in accounts receivable for goods and services (3 861) (11 286) Decrease (increase) in prepaid expenses and accrued income (753) Decrease (increase) in other accounts payable (14 765) (13 986) Decrease (increase) in accrued expenses and deferred income (2 940) Net cash provided by (used in) operating activities (Decrease) increase in long-term liabilities (0) (11 540) Net cash provided by (used in) financing activities (0) (11 540) Banque Safdié SA, Genève; Banque Syz & Co. SA, Genève; Banque Thaler SA, Genève; Banque Vontobel Genève SA, Genève; BanSabadell Finance SA, Genève;

55 Consolidated annual financial statements for Bantleon Bank AG, Zug; Barclays Bank (Suisse) SA, Genève; Basellandschaftliche Kantonalbank, Liestal; Baumann & Cie Banquiers, Basel; BBO Bank Brienz Oberin CHF Increase in fixed assets (8 068) (14 695) Net increase in intangible assets (6 170) (52 622) Increase in holdings (2 124) (3 923) Changes in scope of consolidation Net cash flow provided by investing activities (16 362) (62 456) Unrealized exchange differences 204 (1 277) Net increase in cash and marketable securities Cash and marketable securities at 1 January Cash and marketable securities at 31 December of which marketable securities

56 Notes to the consolidated annual financial statements 1 Summary of significant accounting policies Introduction The consolidated financial statements of the SWX Group have been prepared in accordance with the Swiss Accounting and Reporting Recommendations FER/ARR (Swiss GAAP), and using historic acquisition costs. Scope of consolidation Companies in which the SWX Group holds a majority of the share capital and voting rights, or in which it holds 50% of the voting rights and exerts a significant influence, are fully consolidated. Companies included within the scope of consolidation are listed under note 2. Associated companies, i.e. those in which the SWX Swiss Exchange owns between 20% and 50% of the share capital, are accounted for using the equity method. Holdings of less than 20% are stated at acquisition cost less valuation adjustments. Principles of consolidation The consolidated financial statements are based on the financial statements of the individual companies, which are drawn up at 31 December using uniform accounting policies. Equity is consolidated using the purchase method. Intragroup expenses and income, intragroup accounts receivable and liabilities, as well as unrealized gains on intragroup transactions have been eliminated. The figure for revenues corresponds to billings for services and products provided to third parties, net of sales taxes and reductions in remuneration. Currency translation Balance sheets of Group companies that are drawn up in a foreign currency are translated using year-end exchange rates, while income statements are translated using average exchange rates for the year. Any translation difference is accounted for under equity as a separate item. Transactions in foreign currency are translated using daily exchange rates. Translation differences are recognized as income. The following exchange rates of the most important currencies were used for the consolidated financial statements: Currency Year-end rate Average rate EUR/CHF GBP/CHF USD/CHF Fixed assets Fixed assets are stated at acquisition or production cost less depreciation charged over the useful life of the assets, using the straight-line method. Purchases of fixed assets exceeding CHF are capitalized. The useful life is estimated to be as follows: IT hardware 3 years Equipment, fixtures and fittings 3 years Motor vehicles 3 years Leasehold improvements Duration of rental agreement Investments in subsidiaries and loans Associated companies are consolidated in proportion to the percentage of capital owned. Other minority holdings are stated at cost, and loans at their nominal value. In the event of non-temporary impairment of an investment, a valuation adjustment is made. The net result of this position is included in the income statement under net financial income. Intangible assets Software which is purchased from or developed by a third party and costs more than CHF is capitalized and depreciated over no more than three years. Software produced inhouse is capitalized at production cost and depreciated over an estimated useful life of 5 8 years. Goodwill is depreciated over five years using the straightline method, and its value is re-assessed each year. Other intangible assets such as patents, trademarks and other rights are capitalized at their historical cost and amortized over their estimated useful life (but not more than ten years) using the straight-line method. The amortization is charged to the income statement. hasli, Brienz; BBVA Privanza Bank (Suiza) SA, Zurich; BDL Banca di Lugano, Lugano; BEKB BCBE, Bern; Berenberg Bank (Schweiz) AG, Zurich; Bernerland Bank,

57 Consolidated annual financial statements for Accounts receivable The figure for accounts receivable corresponds to billings less necessary valuation adjustments. Cash and marketable securities The cash position comprises liquid assets, credit balances with banks and the post office, and fixed-term deposits up to 90 days. Cash is carried at its nominal value. Securities with a market value are carried at market value and those with no market value are shown at their net investment value or at cost, less the necessary depreciation. Revenue from this item is included in the income statement under net financial income. Valuation adjustments and provisions Appropriate valuation adjustments are made for identifiable individual risks. Provisions serve to cover risks of loss and performance commitments. They are calculated on the basis of uniform and invariable business management principles. 2 Scope of consolidation The following companies are fully consolidated: SWX Group, Zurich (formerly SWX Holding AG; parent company; share capital CHF ). SWX Swiss Exchange, Zurich (wholly owned; share capital CHF ; securities exchange and securities exchange services). virt-x Ltd., London (formerly virt-x plc; wholly owned; share capital GBP ; holding company of virt-x group). virt-x Exchange Ltd., London (wholly owned; share capital GBP 100; securities exchange). EXFEED AG, Zurich (wholly owned; share capital CHF ; financial information distributor). New Soffex AG, Zurich (wholly owned; share capital CHF ; dormant). SWX Swiss Exchange (UK) Ltd., London (wholly owned; share capital GBP 1; dormant). Holdings in the following companies are accounted for using the equity method: Eurex Zürich AG, Zurich (50% stake; share capital CHF ; European derivatives exchange). On 13 December 2004, the Articles of Association of Eurex Zürich AG were amended to incorporate new provisions governing dividend and liquidation entitlements in respect of the existing participation certificates. Consequently, the share in net income is now calculated at 15% (2003: 20%). Eurex Zürich AG directly or indirectly controls the following substantive companies: Eurex Frankfurt AG, Frankfurt (share capital EUR 6 million; operation of exchanges, in particular securities exchanges, including electronic platforms for derivatives trading). Eurex Clearing AG, Frankfurt (share capital EUR 5.1 million; clearing house and operator of the clearing system for exchange transactions). Eurex Bonds GmbH, Frankfurt (share capital EUR 3.6 million; electronic trading platform for German government bonds, Jumbo-Pfandbriefe [mortgage bonds] and other debt securities, as well as underlying instruments combining a future and a government bond). U.S. Exchange Holding Inc., USA (share capital USD 1 million; parent company of the U.S. Futures Exchange L.L.C., USA). U.S. Futures Exchange L.L.C., USA (share capital USD 44.5 million; fully automated trading in US fixed-income and share-index derivatives). STOXX Limited, Zurich (33.3% stake; share capital CHF ; marketing of European index families). Börsen-Informations AG, Basel (33.3% stake; share capital CHF ; general promotional activities for the Basel financial marketplace, operates Financial Meeting Point in Basel). 3 Changes in scope of consolidation There were no changes in the scope of consolidation in Sumiswald; Bezirkssparkasse Dielsdorf, Dielsdorf; Bezirkssparkasse Uster, Uster; BGG Banque Genevoise de Gestion, Genève; BGP Banca di Gestione Patrimo-

58 Notes to the consolidated annual financial statements 4 Cash and marketable securities in CHF Credit balances with banks Call and time deposits Total cash Money market funds Hedge fund Bonds Other marketable securities Total marketable securities TOTAL CASH AND MARKETABLE SECURITIES The position in the hedge fund is carried at the net investment value, as no market value is available. Because of the uncertainty concerning the valuations of such investments and the fact that not all markets are liquid, these book values may diverge substantially from the realizable values. 5 Accounts receivable in CHF Accounts receivable for goods and services to third parties to related parties Total accounts receivable for goods and services Other accounts receivable from third parties from related parties Total other accounts receivable TOTAL ACCOUNTS RECEIVABLE The item Other accounts receivable from related parties includes an interest-free loan of CHF 3.2 million granted to Eurex Frankfurt for an indefinite period. The loan is carried at its nominal value, as it can be recalled within one week at any time. In 2004, the Swiss Exchange granted U.S. Futures Exchange L.L.C, a company of the Eurex Group, a subordinated loan of CHF 2.7 million. This loan was fully written off on the basis of an impairment review (see note 8). niale SA, Lugano; BHF-Bank (Schweiz) AG, Zurich; Biene - Bank im Rheintal, Altstätten; BIPIELLE Bank (Suisse), Lugano; BLP Banque de Portefeuilles, Lausanne;

59 Consolidated annual financial statements for Prepaid expenses and accrued income in CHF Exchange fees and other revenues Accrued interest on securities Other prepaid expenses and accrued income TOTAL PREPAID EXPENSES AND ACCRUED INCOME Summary of fixed assets in CHF IT hardware Leasehold Other Total 2004 Total 2003 investments Acquisition costs at Additions Changes in scope of consolidation Acquisition costs at Accumulated depreciation at 1.1. (99 709) (13 673) (16 057) ( ) ( ) Additions (13 641) (859) (2 627) (17 127) (22 875) Changes in scope of consolidation (325) Accumulated depreciation at ( ) (14 532) (18 684) ( ) ( ) NET BOOK VALUE AT NET BOOK VALUE AT Fire insurance values in CHF IT hardware Other fixed assets BNP Paribas (Suisse) S.A., Genève; Bondpartners S.A., Lausanne; Bordier & Cie, Banquiers privés, Genève; Bovay & Partenaires SA, Lausanne; BPT Trading SA,

60 Notes to the consolidated annual financial statements 8 Investments in subsidiaries in CHF Eurex Zürich AG, Zurich STOXX Limited, Zurich TOTAL INVESTMENTS IN SUBSIDIARIES On 13 December 2004, the Articles of Association of Eurex Zürich AG were amended to incorporate new provisions governing dividend and liquidation entitlements in respect of the existing participation certificates. Consequently, the share in net income is now calculated at 15% (2003: 20%) and the value of the equity investment has fallen by CHF 3.5 million. In December 2004, Eurex Zürich AG received a capital contribution of CHF 2.1 million. The investment in Eurex Zürich AG, valued using the equity method, amounted to CHF 10.6 million at 31 December This represents a decline of CHF 0.2 million. Against a background of difficult market conditions, the prospects for Eurex s US companies are viewed with restraint. Overall, these companies are operating at a considerable loss. An impairment review was conducted on 31 December 2004, following which an adjustment of CHF 7.1 million was made to the book value of the holding in Eurex Zürich AG. The investment in STOXX Limited, valued using the equity method, amounted to CHF 5.3 million at 31 December This represents a decline of CHF 0.1 million. Lausanne; BPVi (Suisse) Bank SA, Lugano; Bridport & Cie SA, Genève; BS Bank Schaffhausen, Hallau; BW Vermögens-Management (Schweiz) AG, Zurich; C.I.M.

61 Consolidated annual financial statements for Summary of intangible assets in CHF Goodwill Software Externally Internally Total 2004 Total 2003 licences developed developed software software Acquisition costs at Additions Disposals (0) (0) (0) (447) (447) (0) Acquisition costs at Accumulated amortization at 1.1. (38 367) (11 473) (28 532) (5 134) (83 506) (30 788) Additions (320) (866) (7 176) (4 678) (13 040) (52 718) Special amortization (1 064) (1 064) 0 Accumulated amortization at (38 687) (12 339) (35 708) (10 876) (97 610) (83 506) NET BOOK VALUE AT NET BOOK VALUE AT The Group began capitalizing software licences in Externally developed software consists of extended functionalities designed by third parties for the Eurex system. The figure for internally developed software refers to development costs for extending the SWX platform, which have been capitalized since the 2001 financial year. In accordance with inhouse regulations on the capitalization of internally developed software, expenditure incurred in each financial year is capitalized at year-end and written off over an estimated useful life of 5 8 years. In 2004, development costs of CHF 1.1 million were capitalized in connection with the EM7 release. Work was then halted on the basis of current project assessment procedures. The newly launched Quotematch project replaced the EM7 release. The capitalized costs were therefore fully written down. Banque, Genève; Caisse d Epargne d Aubonne, Aubonne; Caisse d Epargne de la Ville de Fribourg, Fribourg; Caisse d Epargne de Nyon, PSA/sgu, Nyon; Caisse

62 Notes to the consolidated annual financial statements 10 Other liabilities in CHF Due for goods and services to third parties to related parties 747 Total due for goods and services Miscellaneous liabilities to third parties to related parties Total miscellaneous liabilities TOTAL OTHER LIABILITIES In 2004, the current account debt of CHF 10.3 million to the SWX Swiss Exchange Association resulting from the transfer of the solidarity fund at 31 December 2003 was settled by means of a cash remittance. 11 Accrued expenses and deferred income in CHF Employee benefits Swiss Federal Banking Commission Other accruals and deferrals TOTAL ACCRUED EXPENSES AND DEFERRED INCOME Pursuant to the ordinance of 2 December 1996 (as amended on 21 October 2003) concerning fees of the Swiss Federal Banking Commission, part of the Commission s costs are covered by a turnover fee levied by the SWX Swiss Exchange on securities trading. The estimated amount payable to the Commission for the 2004 financial year is CHF 9.9 million. d Epargne de Prez, Corserey et Noréaz, Prez-vers-Noréaz; Caisse d Epargne de Siviriez, Siviriez; Caisse d Epargne du District de Cossonay, Cossonay;

63 Consolidated annual financial statements for Provisions in CHF Taxes Repair work Other Total 2004 Total 2003 on rented buildings Book value at Additions Use (13 185) 0 0 (13 185) (7 774) Reclassification (15 854) 0 (892) (16 746) 0 Reversal (19) 0 (1 248) (1 267) (13 511) Foreign currency earnings 26 (1) BOOK VALUE AT The reduction of CHF 0.9 million in other provisions in 2004 is due to the reclassification of accruals for exchange fees. These are now accounted for under Accrued expenses and deferred income. Provisions for taxes are now carried under Miscellaneous liabilities. These provisions are for short-term tax liabilities. 13 Changes in equity in CHF Company Capital Retained Cumulative Total capital reserve earnings translation (premium) difference Equity at Payment of premium ( ) 0 Profit for the year Translation differences (459) (459) Equity at (459) Translation differences Profit for the year Equity at (255) The share capital amounts to CHF 10 million, divided into registered shares of CHF each. On 13 August 2003, the share capital of the SWX Group was raised by CHF 9.9 million to CHF 10 million by means of a non-cash contribution from the SWX Swiss Exchange. The difference between this amount and the acquisition price was recorded as a premium (general legal reserve). The foreign currency difference results from the translation of individual accounts of foreign subsidiaries. Caisse d Epargne du District de Courtelary, Courtelary; Caisse d Epargne du District de Vevey, Vevey; Caisse d Epargne et de Prévoyance d Yverdon-les-

64 Notes to the consolidated annual financial statements 14 Segment data in CHF Spot securities trading Derivatives trading (Eurex Group) Information services Admission fees Revenue from service level agreements Miscellaneous revenue TOTAL REVENUE Revenue from spot securities trading is shown after deduction of a rebate of CHF 20 million (2003: CHF 15 million). Miscellaneous revenue relates primarily to IT services provided for participants, investment protection fees and stamp taxes on the issuance of securities. 15 Personnel expense in CHF Compensation (60 893) (59 448) Social security payments (20 881) (19 537) Other personnel costs (10 630) (10 005) TOTAL PERSONNEL EXPENSE (92 404) (88 990) In 2004, an average of 478 people were on the permanent staff (454 in the previous year). There were 467 full-time positions occupied at 31 December 2004, compared with 447 in Bains S.A., Yverdon-les-Bains; Caixa Bank Banque Privée (Suisse) SA, Genève; CAT Finance AG, Zurich; CBG Banca Privata Lugano SA, Lugano; CBG Compagnie

65 Consolidated annual financial statements for Other operating expenses in CHF Repairs and maintenance (17 215) (17 915) Public relations and marketing (5 871) (5 652) Telecommunications (15 972) (19 648) Rental expense (9 431) (8 637) Turnover fee payments to the Swiss Federal Banking Commission (9 407) (8 386) Agency agreement with Eurex (55 290) (42 735) Consultancy and services (24 911) (23 955) Miscellaneous operating expenses (20 072) (18 062) TOTAL OTHER OPERATING EXPENSES ( ) ( ) The increase in expenses for the agency agreement with Eurex is mostly due to costs incurred in connection with the latter s US business, and higher taxes which cannot be reclaimed. Bancaire Genève, Genève; Citation SA, Zurich; Citibank (Switzerland), Zurich; Clariden Bank, Zurich; Commerzbank (Schweiz) AG, Zurich; Compagnie Bancaire

66 Notes to the consolidated annual financial statements 17 Net financial income in CHF Interest income Dividend income Other income Financial income Interest expense (185) (279) Bad debt expense (33) (72) Other financial expense (777) (372) Financial expense (995) (723) Impact of new arrangement for participation certificates of Eurex Zürich AG (3 544) Income from equity stake in Eurex Zürich AG (186) 509 Income from equity stake in STOXX Limited (109) 378 Impairment, Eurex Zürich AG (7 130) Income from non-consolidated holdings (10 969) 887 Securities earnings (1 284) (325) Foreign currency earnings (1 276) 348 Valuation and exchange differences (13 529) 910 TOTAL NET FINANCIAL INCOME (6 608) Dividend income for 2004 includes a dividend payment of CHF 4.0 million by STOXX Limited for the 2003 financial year. More details of income from non-consolidated holdings are provided in note 8. Espirito Santo SA, Lausanne; cosba private banking ag, Zurich; Credit du Lac S.A., Lugano; Crédit Mutuel de la Vallée SA, Le Sentier; Credit Suisse Fides,

67 Consolidated annual financial statements for Other expense/revenue in CHF Miscellaneous expenses (3 061) (2 764) Other expense (3 061) (2 764) Reversals of provisions Other prior period adjustments Other revenue TOTAL OTHER EXPENSE/REVENUE (2 694) Taxes in CHF Capital and income taxes (15 416) (9 300) Deferred income taxes 953 (5 182) TOTAL TAX EXPENSE (14 463) (14 482) Deferred income taxes are calculated on the differences between the book values of individual company accounts and the values used for consolidation purposes. A tax rate of 25% was applied for the calculation of deferred income taxes. Zurich; Credit Suisse First Boston, Zurich; Credito Privato Commerciale SA, Lugano 4 Caselle; Daiwa Securities SMBC Europe Limited, London, Geneva Branch,

68 Notes to the consolidated annual financial statements 20 Off-balance sheet transactions Contingent liabilities The SWX Swiss Exchange has committed itself in a comfort letter to providing Eurex Clearing AG, Frankfurt, with 20% of the financial resources it needs to fulfil its obligations as a clearing house. The terms of this undertaking were revised with effect from 1 January The commitment is now 15% and limited to a maximum amount of EUR 105 million. This new arrangement replaces the comfort letter of 8 November The commitment is 20% for events prior to 1 January The SWX Swiss Exchange has issued a legally non-binding declaration to the Financial Services Authority (FSA) in favour of the U.S. Futures Exchange L.L.C., a company of the Eurex Group, under which it recognizes its moral obligation to provide financial support as an indirect shareholder and within the context of the joint venture with Deutsche Börse AG. In compliance with regulatory requirements of the FSA, the SWX Swiss Exchange has committted itself to providing virt-x Ltd. with sufficient financial resources at any time. virt-x Exchange Ltd. has undertaken to make compensation payments to London Clearing House Limited (LCH) if the services provided in connection with the central counterparty for securities trading at virt-x are terminated before 4 May Such compensation would be equivalent to the daily turnover which LCH would have to forfeit if the services were discontinued, less all expenses which LCH would no longer incur as a result of their termination. It is not possible to quantify this commitment. Any compensation payment that might be made is limited to a maximum of GBP 2 million. virt-x Exchange Ltd. has undertaken to make compensation payments to SIS x-clear AG (x-clear) if the agreement in connection with the central counterparty is terminated before 4 May Such compensation would be equivalent to the daily turnover which x-clear would have to forfeit, less all expenses which x-clear would no longer incur as a result of the termination of its service. It is not possible to quantify this commitment. Any compensation payment that might be made is limited to a maximum of GBP 1 million. In a letter to London Clearing House Limited (LCH) dated 14 November 2002, the SWX Swiss Exchange confirmed that in the event of a resumption of trading in SMI stocks by SWX, LCH would be able to continue providing settlement services for these stocks on the same terms as agreed with virt-x and that the SWX Swiss Exchange would compensate LCH for any additional expenses incurred. Long-term contracts Rental contract with the Canton of Zurich for the stock exchange building at Selnaustrasse (expiry 2012) Rental contract with Canary Wharf Management Ltd., Canary Wharf, London (expiry 2005) Cooperation agreement with Deutsche Börse concerning Eurex Zürich AG (expiry 2014) 21 Pending transactions The risks inherent in pending transactions are covered by Other provisions. Genève; DC Bank Deposito-Cassa der Stadt Bern, Bern; Decova S.A., Genève; Deka (Swiss) Privatbank AG, Zurich; Delen (Suisse) SA, Genève; Dexia Privatbank

69 Consolidated annual financial statements for Post-balance-sheet events No events occurred after the balance sheet date which would have a material impact on the consolidated financial statements for the year ended 31 December Related parties In the course of normal business operations, the SWX Group provides services for the following related parties: SWX Swiss Exchange Association Eurex Zürich AG, Zurich, and the subsidiaries held by it either directly or indirectly, essentially: Eurex Frankfurt AG, Frankfurt, Eurex Clearing AG, Frankfurt, Eurex Bonds AG, Frankfurt, U.S. Exchange Holding Inc., U.S. Futures Exchange L.L.C. STOXX Limited, Zurich in CHF Derivatives trading, Eurex Group Service level agreements, Eurex Zürich AG Service level agreements, STOXX Limited Agency agreement, Eurex Zürich AG (55 290) (42 735) TOTAL RELATED PARTIES Services are billed on an arm s-length basis. 24 Staff pension fund There is an affiliation with a collective insurance foundation that insures the employees of the SWX Swiss Exchange, STOXX Limited and Eurex Zürich AG. In order to show pension fund liabilities as required by Swiss GAAP (FER/ARR 16), this affiliation is treated as a defined contributions plan, i.e. its assets and liabilities are not carried in the balance sheet, and the portion of personnel expense accounted for by the employer s contributions CHF 6.7 million, against CHF 7.4 million in 2003 equals the booked expense. Reserves for the employer s contributions amounted to CHF 3.4 million at 31 December 2004 (CHF 3.4 million in 2003). The SWX Group has set up a welfare foundation for discretionary payments and the financing of retirement benefits, in order that employees of companies with which it has close business or financial ties are insured against the economic consequences of old age, disability and death. Since the foundation was established, the SWX Swiss Exchange has paid in an amount of CHF 18 million (CHF 5 million in 2004 and CHF 5 million in 2003). (Schweiz) AG, Zurich; Dominick Company AG, Privatbank, Zurich; Dresdner Bank (Schweiz) AG, Zurich; DRYDEN BANK SA, Genève; EB Entlebucher Bank, Schüpfheim;

70 REPORT OF THE GROUP AUDITORS Zurich, 11 February 2005 As auditors of the group, we have audited the consolidated financial statements (balance sheet, income statement, statement of cash flows and notes, pages 52 to 69) of SWX Group, Zurich, for the year ended 31 December These consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flows in accordance with Swiss GAAP ARR and comply with Swiss law. We recommend that the consolidated financial statements submitted to you be approved. Ernst & Young Ltd. sig. Thomas Schneider Swiss Certified Accountant (in charge of the audit) sig. Iqbal Khan Swiss Certified Accountant EFG Private Bank SA, Zurich; EGOBANK SA, Lugano; Ersparnisanstalt der Stadt St. Gallen, St. Gallen; Ersparnisanstalt Oberuzwil, Oberuzwil; Ersparnisge-

71 Consolidated annual financial statements for sellschaft Küttigen, Küttigen; Ersparniskasse Affoltern i.e., Affoltern i.e.; Ersparniskasse des Amtsbezirks Interlaken, Interlaken; Ersparniskasse Erlins-

72 BALANCE SHEET bach, Erlinsbach; Ersparniskasse Rüeggisberg, Rüeggisberg; Ersparniskasse Schaffhausen, Schaffhausen; F. van Lanschot Bankiers (Schweiz) AG, Zurich; Ferin CHF ASSETS Credit balances with banks Time deposits Total cash Money market funds Hedge fund Bonds Total marketable securities Total cash and marketable securities Accounts receivable from third parties Total accounts receivable Prepaid expenses and accrued income Total current assets Investments in subsidiaries Total non-current assets TOTAL ASSETS

73 Annual financial statements for 2004 of the SWX Group 73 in CHF LIABILITIES AND EQUITY Accounts payable to related parties 0 80 Total accounts payable 0 80 Total short-term liabilities 0 80 Provisions Total long-term liabilities Total liabilities Share capital Legal reserve Profit brought forward Profit for the year Total equity TOTAL LIABILITIES AND EQUITY rier Lullin & Cie SA, Genève; Fibi Bank (Schweiz) AG, Zurich; FIDEURAM Bank (Suisse) SA, Lugano; Fidurhône SA, Genève; Finacor SA, Basel; Financière Mermod

74 INCOME STATEMENT in CHF from from to to INCOME STATEMENT Personnel expense (0) (50) Other operating expenses (170) (65) Operating income (170) (115) Interest income Securities earnings Dividends Write-downs on investments in subsidiaries (0) (2 303) Foreign currency earnings (0) (197) Other financial expense (289) (129) Net financial income Profit before taxes Taxes (556) (265) PROFIT FOR THE YEAR S.A., Lausanne; Financière SBA (Suisse) SA, Genève; Finter Bank Zurich, Zurich; FTI Banque Fiduciary Trust, Genève; Glarner Kantonalbank, Glarus; Gonet &

75 Annual financial statements for 2004 of the SWX Group 75 NOTES TO THE ANNUAL FINANCIAL STATEMENTS Guarantees and guarantee obligations in favour of third parties There are no guarantees, guarantee obligations or assets pledged in favour of third parties. Investments in subsidiaries in CHF SWX Swiss Exchange, Zurich STOXX Limited, Zurich EXFEED AG, Zurich TOTAL INVESTMENTS IN SUBSIDIARIES A list of the subsidiaries of the SWX Group, showing their business activity, their share capital and the stake held, can be found on page 57. Equity in CHF Share capital Legal reserve Profit brought forward Profit for the year TOTAL EQUITY The SWX Group s share capital amounts to CHF , is fully paid up and is divided into registered shares with a nominal value of CHF each. All the shares of the SWX Group are owned by the SWX Swiss Exchange Association. Cie, Banquiers, Genève; Graubündner Kantonalbank, Chur; GRB Glarner Regionalbank, Glarus; Habib Bank AG Zurich, Zurich; Hardcastle Trading AG, Rapperswil

76 PROPOSAL OF THE BOARD OF DIRECTORS Proposal of the Board of Directors concerning the appropriation of profit The Board of Directors proposes that the profit for the year of CHF should be carried forward. SG, Hentsch Henchoz & Cie, Lausanne; Héritage Finance & Trust S.A., Genève; HSBC Guyerzeller Bank AG, Zurich; HYPOSWISS Privatbank AG, Zurich; IBI Bank AG,

77 Annual financial statements for 2004 of the SWX Group 77 Zurich; IMC International Marketmakers Combination B.V. Amsterdam, Niederlassung Unterägeri (ZG), Unterägeri; IntesaBci Bank (Suisse), Zurich; Investec Bank

78 REPORT OF THE STATUTORY AUDITORS Zurich, 11 February 2005 As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes, pages 72 to 77) of SWX Group, Zurich, for the year ended 31 December These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accounting records and financial statements (and the proposed appropriation of available earnings) comply with Swiss law and the company s articles of incorporation. We recommend that the financial statements submitted to you be approved. Ernst & Young Ltd. sig. Thomas Schneider Swiss Certified Accountant (in charge of the audit) sig. Iqbal Khan Swiss Certified Accountant (Switzerland) AG, Zurich; IRB Interregio Bank, Reinach; Israel Discount Bank (Switzerland) SA, Genève; ITAG Vermögensverwaltung, Basel; J. P. Morgan (Suisse)

79 Annual financial statements for 2004 of the SWX Group 79 SA, Genève; J. P. Morgan Fleming Asset Management (Schweiz) AG, Zurich; Jefferies (Switzerland) Ltd., Zurich; Jyske Bank (Schweiz), Zurich; Kredietbank

80