NYSE Euronext CEO Duncan Niederauer Examines the Future of Capital Markets

June 9, 2009

Speaker:
Duncan Niederauer, Chief Executive Officer & Director, NYSE Euronext

Presider:
James S. McDonald, President & CEO Rockefeller & Co., Inc; Chairman, Japan Society

Duncan Niederauer of NYSE Euronext spoke about the state of the global capital markets and the financial crisis.

"As recently as 12 months ago we thought we dodged the bullet with Bear Stearns," Mr. Niederauer said. "Most of us would not have predicted what we have lived through in the 12 months since then." In September and October of 2008, "you had markets start to crack," and "it seemed like every weekend it was a crisis that you are only supposed to see every 10 or 20 years."

"We all managed through it pretty well. I'm very proud of how the Exchange held up its end of the bargain," he said.

"To me, it was all about being open, as trivial as that sounds. If you think about it, regulated transparent markets like ours were open throughout the crisis. We never thought about closing our doors," despite rumors to the contrary that circulated in the media.

"I think we now find ourselves at a crossroad where there are signs that we might be on the road to recovery, reasons to be cautiously optimistic," he continued. Equities held onto their gains during April and May of this year. There've been a handful of successful IPOs, though "for the time being, don't be rooting for the floodgates to open" in this sector. "Unless companies can tell you they are in a growth industry, they are a very successful company in that industry, and they have been able to demonstrate that they can perform through the crisis we have just been through--I don't think companies should go public if they can't answer all those questions."

Consumer confidence "is slowly but surely returning," and in his view this is the most important factor in investor confidence. If people "don't feel confidence about their job and their job prospects, the roof over their head and their ability to take care of their family, I think those are all issues they think about way before they think about whether they should come back into the equity market."

It's important that as a nation we look forward, not backward, Mr. Niederauer said, and also that countries around the world not try to pin the blame for the financial crisis on globalization. "It has to be a time about unity and cooperation right now, not about protectionism."

The federal government's rescue of the financial system "was not something they woke up one day and said 'This was part of our business plan,'" he said. "That involvement was out of necessity. So, we can sit here and debate whether we like it, don't like it, it's a good thing or a bad thing. The fact is, if they hadn't come to the rescue, they were the only ones that could provide that kind of stability at the moment we were at."

Government management of the financial sector can't help but "upset the competitive equilibrium," he commented. "Some people have government money, some people don't," and the disparities can have unforeseen consequences. When the Dutch prime minister guaranteed the deposits of two of Holland's big banks, namely the two that really needed help, ironically that act triggered a run on the two stronger banks; the prime minister ended up having to guarantee deposits at all four. "These are the things we just have to be ready for, because most of us haven't seen these kinds of things in our career."

The New York Stock Exchange is 217 years old, Mr. Niederauer pointed out. "For 213 years we were a member-owned organization," a model that "effectively worked until about 2005." The company went public in 2006 and acquired Euronext in 2007. "We're global. We are multi-product. We are more a technology company frankly than a financial services company."

The company's aim is to be able to "push data around to anybody who wants to consume it around the world." Nearly 20 Japanese companies are listed with NYSE Euronext, he noted, including such household names as Sony, Panasonic, Mitsubishi, Honda and Toyota. "Many of them have continued to have success throughout the crisis; they are among the highest-cap stocks on the NYSE."

One of the chief missions of NYSE Euronext is to speak out on the interests and needs of the listed companies and the global issuer community. Thus "we're spending a lot of time with our customers, we're spending a lot of time in Washington, and we are trying to speak with our voice on behalf of our customers, because we are viewed as independent, we are viewed as objective, and we are on the side of the angels, because we are a transparent regulated exchange in a post-crisis world where everybody just figured out that regulation and transparency are critically, critically important."

The current financial crisis "is not surprising, and don't let anyone tell you it is unprecedented," Mr. Niederauer concluded. History shows that every seven or eight years, going back to the 1930s, there is a financial crisis, from the Latin American banking crisis to the bursting of the high-tech bubble to the current turmoil. The reason? The U.S. has "a free-market philosophy; it has made a conscious decision to have a largely self-regulated financial services industry. We have signed up for a regulatory construct that we know by definition would be challenged to keep up with the pace of innovation in a largely self-regulated industry."

So "to sit here and throw up your hands and say 'I'm completely taken aback by this, I'm completely surprised,' is unfortunately an interesting emotional stance to take, but actually an uninformed stance to take."

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Q&A from the audience followed.

What's going to happen with financial regulation? Which prospective changes do you find positive, and which negative?

There will be a period of re-regulation, "and we keep trying to encourage everybody that that is understandable--we know that's what has to be done," replied Mr. Niederauer.

"If we think the opaque and unregulated markets didn't work, then why are so many products allowed to trade in opaque and unregulated markets?" he asked. It may not be necessary to have every type of instrument traded on an exchange--"it may be adequate to just eliminate bilateral clearing and have transparent reporting of the trades. That may accomplish what we need to accomplish. But I don't think these opaque derivative markets are going to be allowed to persist."

As for hedge fund regulation, it will likely follow the one-size-fits-all model of Sarbanes-Oxley disclosure rules; it's unfortunate, he said, but "that's one of the easy, quick wins that Washington thinks they are going to get."

For those of us who were involved in the growth and proliferation of the futures markets 10 and 20 years ago, the systematic analysis of volatility became the basis on which those markets really flourished and academic research took off. Now the area of opportunity, if we get past the current crisis, is credit. When will the organized corporate finance markets begin to look at systematizing volatility studies?

"That's a great question," Mr. Niederauer answered. "You only get partial credit for asking it. But if you can answer it, we may hire you."

"The futures and options markets actually traded very well, very fluidly, very smoothly, and properly utilized, are risk-reduction tools, not tools that lend themselves to manipulation or inappropriate risk management." But there's too little known about the unregulated credit derivatives markets, starting with the size of the problem. This may have been "grossly exaggerated," since "most people in the chain actually laid off their risk along the way."

There are likewise unknowns about the relationships between the credit markets and the equity markets, he said. "Let's say we get what we're looking for in short-sale legislation in the equity market, that's great, but if there is a real linkage between the credit and equity markets that no one is able to assess, did we really solve the problem?"

We've seen forced mergers of financial institutions over the last several months, and now we're hearing that the government feels that Citigroup needs to be broken up. What are your views on this?

"Integration is challenging, because you force two people together who really don't want to be together in most cases. But I think given time and appropriately talented and seasoned management, I would be very optimistic about what those companies can build," Mr. Niederauer said.

On Citigroup, "I don't have an opinion," he added. It's generally not a good idea for the government to float trial balloons, but at this point "I think we've got to give them a little more slack than we're all giving them." There's no precedent or playbook to look to; "we are all learning as we go on this."

Why did you make the decision to invest so heavily in technology in the past year, rather than something with perhaps a more immediate payoff? You had the fire literally licking at your ankles.

"Our job now is to come out of the crisis better than we went in," replied Mr. Niederauer. "My view that I kept emphasizing internally was let's not get so caught up in the crisis that we get paralyzed from doing what we know are the right things."

Could you comment on media reports that the NYSE is in talks with Deutsche Börse for a possible merger?

"We are not, and nor do we plan to be," Mr. Niederauer said.

The partnership between the NYSE and the Tokyo Stock Exchange was built on a friendship between Mr. Thain, your predecessor, and Mr. Nishimuro, then CEO of the Tokyo exchange. What are you and Mr. Saito, the TSE's current CEO, now working on together?

"Saito-san and I are actually quite close as well," said Mr. Niederauer, and this September, NYSE Euronext and the TSE expect to launch the Tokyo Derivatives Exchange, which will be the first exchange in Japan to trade single-stock options. The TSE will operate the exchange using NYSE technology. This is "something I think is long overdue in Tokyo," where these options are currently traded only over the counter.

--Katherine Hyde