Strategy Oslo Børs VPS

The Oslo Børs VPS group comprises Oslo Børs VPS Holding ASA, Oslo Børs ASA, Verdipapirsentralen ASA and Oslo Market Solutions AS. 

Oslo Børs ASA owns 100% of the share capital of NOTC AS and 97% of the share capital of Fish Pool ASA. Verdipapirsentralen ASA owns 100% of the share capital of Centevo AB. Oslo Børs VPS Holding ASA operates from Tollbugata 2, Oslo. Unless otherwise stated, this commentary applies to the Oslo Børs VPS group.

Through the marketplaces operated by Oslo Børs ASA, NOTC AS and Fish Pool ASA, the central securities depository and settlement activities operated by Verdipapirsentralen and the service range offered by Oslo Market Solutions and Centevo, the group aims to offer attractive marketplaces, settlement and registration of securities and information services for financial instruments, in order to give its customers access to an efficient capital market.

The group has formulated its overall strategy for the imminent strategy period with the objective of meeting the increasing competition faced by its core businesses, as well as of generating increasing revenue from value-adding services.

The strategy attaches importance to ensuring that the group continues to operate a state-of-the-art and competitive infrastructure. In addition to this, the group aims to create additional sources of revenue by attracting new customers and building value-adding products and services that complement its core activities. The Oslo Børs VPS group enjoys a high degree of strategic and financial flexibility, and the Board accordingly has a very positive view of the opportunities that the continuing development of its activities will offer.

The group’s main challenges over the next few years will be changes in regulation as well as the competitive environment in Europe and the effect these factors will have on the entire Norwegian securities chain, including listing, registration, trading and settlement.

At an overall level, the group intends to achieve the following goals:

  1. We will operate a profitable and attractive financial infrastructure
  2. We will develop and market profitable value-adding services that meet the market’s requirements
  3. We will be the preferred securities chain for domestic companies, investors and investment firms
  4. We will develop greater international interest in the group
    • The leading marketplace for selected sectors
    • Broadly based and robust distribution network
  5. We will be an attractive workplace
  6. We aim to have satisfied shareholders

The group aims to preserve and develop its position in the listing and registration markets in Norway and to strengthen its position as the principal marketplace on which to trade listed securities. The group will also aim to strengthen its position internationally, both in relation to the listing of companies within the group’s sectors of particular strength and as a supplier of information and related services.

For the group to increase its earnings in the time ahead it needs to generate continued revenue growth from all the areas in which it operates. While market conditions and the amount of revenue reported by the group will vary over time, the group’s aim is to create the basis for underlying growth, regardless of varying market conditions.

The environment in which the group operates is seeing extensive changes of a technological, competitive and regulatory nature. The securities market is seeing increasing levels of interest and use. This is particularly the case in relation to the savings and pension markets. On the basis of the current picture, the Board has decided on a strategy of organic growth for Oslo Børs, with a target of achieving growth in both the Norwegian and international markets. Oslo Børs will progress its strategy by concentrating on important sectors in the Norwegian securities market as well as by developing and selling value-adding services. Oslo Børs is well-positioned to compete in this market.

In 2018 the Board will particularly focus on its strategy for VPS. This will include considering how best to position this company for further growth in light of the changes in the regulatory framework caused by the introduction of the Central Securities Depositories Regulation (CSDR).

The Board has also considered the group’s capital structure. During the first six months of 2018 the Board will increase the amount of interest-bearing debt held by Oslo Børs VPS Holding ASA by around NOK 450 million (i.e. by an amount approximately equivalent to the group’s average annual EBITDA over the last three years), with a payment then subsequently made to shareholders.

The greatest threats faced by the group in the time ahead consist of not being able to maintain Oslo Børs’s position as the principal marketplace on which to trade listed Norwegian securities and of not being able to position VPS for the increasing level of competition for central securities depository business.

Competition for listing and trading securities is international and has been accelerating for the last decade. The level of competition faced by the group’s settlement and registration activities is expected to increase as the European Central Bank’s settlement platform Target2Securities (T2S) and the EU’s Regulation on Securities Settlement and on Central Securities Depositories (CSDR) are implemented in Europe. The new Directive on Markets in Financial Instruments (MiFID II), which came into force on 3 January 2018, will lead to the launch of new trading platforms also offering trading in Norwegian securities. Increased regulation and greater complexity may cause trading and settlement activity to be concentrated to an increasing extent at a small number of member firms.

Current and future newly-created central securities depositories (CSDs) in Europe will over time seek to acquire customers across international borders. Structural changes may create new, larger depositories that operate across international borders, but large European players have found this to be challenging. Due to differences between the various markets, pan-European CSDs will not be able to take full advantage of their economies of scale in the Nordic market. For example, the implementation of two separate systems is planned for Sweden and Finland despite the CSDs in the two countries having the same owner. VPS currently has a strong market position and satisfied customers. In a market more exposed to competition, however, it may be challenging for VPS to maintain its current market share. VPS offers a broad range of services that meet the requirements of all customer groups. However, VPS operates with lower business volumes than potential Nordic competitor CSDs, which means that cost-effective operations and a high level of quality are essential if any future pressure on prices is to be counteracted. The group’s strategy for strong sectors has contributed to VPS already having attracted more international issuers than is the case for CSDs with which VPS might naturally be compared. Furthering this strategy and ensuring that VPS successfully implements IT solutions that enable it to attract further international customers are important to ensuring that business volumes are maintained and increased at VPS.

In 2017 VPS continued to modernise those of its products and services that are of greatest significance to its customers in their day-to-day activities. This work will continue in 2018. VPS will prioritise modernising and developing its end-user solutions, while also continuing to standardise notifications and functionality, which is important to reducing costs for customers. VPS will in parallel simplify its core system so that a future modernisation project will be smaller in scope and involve less risk. Technical requirements arising from new European regulations are being developed as part of the existing system. VPS will also work on the roadmap for its new core system.

Following a delay announced by Finland, the earliest that T2S will be fully implemented in Europe for the euro markets is 2018. T2S will lead to new competition for post-trade activities in the markets connected to the settlement system. The experience from markets and CSDs that have connected to T2S so far seems to suggest that the quality is better than anticipated, but that the costs are higher as well. This may result in the downward pressure on service providers’ margins potentially not being as great as previously anticipated. The impact of T2S will depend on how many countries and CSDs outside the euro zone decide to participate. This is currently uncertain. VPS announced in 2012 that it would hold back from joining T2S and address the issue again at a later date. As part of this approach, the Norwegian National User Group (NUG) resumed its work in November 2015 at the request of VPS. So far, the Norwegian market has shown little interest in the issue. Reports from Sweden suggest the situation is the same there. VPS is at the same time working on further developing its services using its roadmap to ensure that they are harmonised with the rest of Europe, and are competitive and attractive.

With the exception of Euronext’s acquisition of the Irish Stock Exchange, Europe’s financial infrastructure has not seen much consolidation. Globally, attempts at consolidation have in recent years been stopped by shareholders or national authorities.

Changes to European regulation

Future changes in the regulatory framework will have an impact on the Oslo Børs VPS Holding group. Over recent years, the EU has intensified its work on regulating the infrastructure for financial instruments. EU initiatives in this area will affect Oslo Børs VPS Holding ASA to varying degrees.

As part of their program to create a transparent, stable and more coordinated financial system, the European Parliament and the European Council have approved revisions to various pieces of legislation in the securities area.

As far as Oslo Børs is concerned, it is the new Directive on Markets in Financial Instruments (MiFID II) and the associated regulations that are particularly relevant. MiFID II replaced MiFID I (from 2007). MiFID II principally applies to investment firms and trading venues.

MiFID II has introduced a new type of trading venue for fixed income issues and other types of non-equity-related financial instruments known as Organised Trading Facilities (OTFs). Requirements have also been introduced whereby trading in certain types of standardised cleared OTC derivatives has to take place on regulated trading venues.

MiFID II has also brought in restrictions on the trading of listed shares in trading venues where orders are not made public (known as dark pools). Limits have been introduced on the volume of trading that can take place in any single share in dark pools over a given period. Such limits are determined by the European Securities and Markets Authority (ESMA) and apply to total trading volumes across the EEA area.

MiFID II has also widened the scope of the regulation to which multilateral trading facilities are subject. Oslo Børs operates two MTFs, namely Oslo Connect (for non-standardised derivative contracts) and Merkur Market (for equity capital instruments). MiFID II has also introduced a new type of MTF for SMB companies.

MiFID II has also brought in detailed regulation for algorithm-based trading, including requirements for marketplaces’ rules and control over such trading. MiFID II represents greater transparency (disclosure of information about orders and trades) for trading in shares, the consolidation of market information and a greater focus on investor protection. With regard to fixed income securities, MiFID II has introduced both pre-trade and post-trade transparency rules, an area that was not regulated in MiFID. However, a range of exceptions apply that mean that there is still not the same degree of harmonisation between fixed income marketplaces as there is for equities. Oslo Børs has adapted its systems, rules, authorisations and organisational structure to meet the new requirements introduced by MiFID II.

Changes have also been approved to the Transparency Directive (periodic financial reporting and disclosure of large shareholdings). With regard to new legislation, Norway is behind compared to the EU where the directive was implemented from November 2015. New Norwegian legislation implementing the Transparency Directive has been proposed in NOU 2016:2, but the new legislation has on the whole not yet been adopted. However, the requirement for quarterly financial statements was rescinded with effect from 1 January 2017. In connection with this, Oslo Børs has incorporated into its Code of Conduct for IR a recommendation that companies publish quarterly reports for the first and third quarters in addition to the half-yearly and annual reports that are required by law. The changes to the Transparency Directive will also broaden the rules on the disclosure of large shareholdings to include financial derivatives and will make the rules on the disclosure of large shareholdings more harmonised between EEA states. A central access point for each EEA state’s officially appointed storage mechanism (OAM) will be introduced at ESMA, with reporting formats also standardised. Oslo Børs operates the OAM for Norway. This will lead to the need for common technical solutions to be developed in the EEA and will therefore involve development costs for the area’s OAMs.

The EU has also approved a new Market Abuse Directive (MAD II) and regulation (MAR). It is only the MAR that is directly relevant to Norway as an EEA state, as MAD II regards the criminal sanctions for market abuse. MAR is intended to harmonise and increase the efficiency of the rules on market abuse (publication of inside information, prohibitions against insider trading and market manipulation) in the EEA area. Oslo Børs is the supervisory authority for listed companies in relation to their duty to publish inside information. It is expected that Oslo Børs will be able to continue to fulfil this function after MAR is transposed into Norwegian law. With regard to new legislation, Norway is behind relative to the rest of the EU, where the regulation was implemented in July 2016. New legislation transposing MAR into Norwegian law has been proposed in NOU 2017:4, but the legislation has not yet been adopted.

A new regulation (the Central Securities Depositories Regulation, CSDR) that regulates the activities of central securities depositories and the settlement system and sets new rules for the settlement of transactions in financial instruments was approved in 2014 and has entered into force in the EU. The regulation is intended to maintain financial stability and also to improve the efficiency of cross-border activities and increase competition between CSDs across international borders. A number of additional Commission Regulations have already been approved, and the final regulations are expected to be approved in the first six months of 2018. These regulations set comprehensive requirements for European CSDs in relation to the design of the technical solutions employed, their management structures and their transparency in relation to customers, the authorities and the public.

Existing CSDs will have to apply for new authorisation under CSDR. European CSDs submitted their applications in September 2017, and a small number have received authorisation under CSDR. With regard to VPS, the application deadline will depend on when CSDR is transposed into Norwegian law. CSDR is one of several EU legal acts whose transposition into Norwegian law has been delayed due to constitutional issues. CSDR is expected to be incorporated into the EEA Agreement during 2018. The Norwegian Ministry of Finance has carried out a consultation exercise regarding a proposed new Securities Register Act that transposes CSDR into Norwegian law, and is currently working on a draft bill for consideration by the Norwegian parliament. VPS expects a legislative decision to be taken on the matter in the second quarter of 2018.

Both CSDR and T2S are expected to result in new competition in the post-trade area in Europe. However, the effects of both so far seem to have been limited. It is expected that the new competition will initially relate to the fixed income market, and there are already some signs of competition developing in this area. VPS has been encountering competition particularly in relation to EUR-denominated bonds for a number of years. The new competition is expected to relate to NOK-denominated bonds. With regard to equity capital instruments, for the moment there are such significant differences across the EEA countries in terms of company law, taxation law and market practice in relation to corporate events that extensive competition for issuers is only expected to develop somewhat further into the future. The European authorities have launched a number of initiatives to achieve greater harmonisation, including revising the Shareholders’ Rights Directive. It is, however, not clear when we will see the effects of what has been set in motion or when the initiatives that have been announced will be implemented.

In 2017 the Norwegian savings market saw sizeable change in the form of new regulations introducing share savings accounts and individual pension savings accounts. The proposed changes to the Defined Contribution Pensions Act, which will make it possible for employees to combine their pension savings into a single pension account (an individual pension account), represent a new initiative by the authorities that is intended to encourage more saving. The proposed changes were circulated for consultation with a response deadline in February 2018. These new initiatives are resulting in more competition in the savings market, and the digital solutions that different companies operate for distributing and displaying customers’ overall holdings are central elements in their efforts to win customers. This is also of significance to VPS. In addition, the Revised Payment Services Directive will be transposed into Norwegian law. This directive does not regulate securities accounts, but is nonetheless expected to be of significance to VPS’ customers in a way that means it may also be of significance to VPS.

The transposition of MiFID II/MIFIR into Norwegian law has primarily affected VPS’ customers. They have, however, requested solutions from VPS to help make it easier for them to fulfil their obligations pursuant to the new rules.

On 22 December 2015 the Ministry of Trade, Industry and Fisheries in collaboration with the Ministry of Finance consulted on a number of possible options for increasing transparency regarding the information currently contained in companies’ shareholder registers and the Norwegian Tax Administration’s Shareholder Register. The proposals include options that involve setting up a public register with information on the ownership of limited companies. Some of the proposed solutions would require information to be provided from securities registers. The Ministry is continuing to look into the issue.

The regulatory changes discussed above have already caused a number of companies to make changes to their strategies and business models. These changes are expected to continue in the time ahead.

Contact us

Geir Heggem

Geir Heggem

Group Chief Financial Officer
+47 22 34 17 22
+47 95 23 88 11