Euronext NV

PAR:ENX

Earnings Call Transcript 2022-Q2

[Operator]

Hello and welcome to the Euronext Second Quarter 2022 Results Call. My name is Courtney and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration your lines will be on listen-only. [Operator Instructions]

And I will now hand you over to your host, Stephane Boujnah, CEO and Chairman of the Managing Board joined by Giorgio Modica, CFO to begin today's conference. Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Good morning, everybody, and thank you for joining us this morning for the Euronext second quarter 2022 result conference call and webcast. I am Stephane Boujnah, CEO and Chairman of the Managing Board of Euronext.

And I will start with the highlights of the second quarter, before handing over to Giorgio Modica, Euronext CFO, who will further develop the main business and financial highlights of the quarter.

Euronext, as you have seen, reported a solid performance in the second quarter of 2022, with revenue reaching EUR374.7 million. This demonstrated once again the strength of our business model in a quarter marked by continuous volatility. Both revenue and adjusted EBITDA grew double-digit, compared to what was already a very good second quarter of 2021. This growth is, of course, partly due to the consolidation of the Borsa Italiana Group in the latest quarter compared with only two months of consolidation in Q2 2021. As you may remember, we completed the acquisition of the Borsa Italiana Group on the 29th of April 2021.

But this strong performance is also the outcome of solid organic growth across all our activities, driven by several specific factors. First, both non-volume-related revenue and trading activities were up plus 2.5% pro forma, compared to the performance of the second quarter of 2021 underlying revenue. Second, we continued the deployment of our strategic plan, unlocking the first revenue synergies related to the acquisition of the Borsa Italiana Group, thanks to the migration of our Core Data Center to Bergamo. Non-volume-related revenue accounted that quarter for 59% of the total revenue and covered 144% of underlying operating expenses, excluding D&A.

And on the cost side, the reported increase that you observe is -- in underlying expenses, excluding the D&A, primarily reflects the consolidation of costs from the acquisition of the Borsa Italiana Group. But please note that we managed to partially offset this impact by continued cost control and delivery of additional synergies. Overall, these numbers translated into a plus 2.5% increase pro forma in adjusted EBITDA to EUR221.7 million, resulting in a net adjusted EBITDA margin of 59.2%, in the context of ongoing strategic project and integration costs. And this led to a solid plus 6.4% growth of our adjusted net income to EUR143.2 million. And adjusted EPS was up at EUR1.34, down by 6.1%.

This second quarter, moving to Slide five, was a significant one for the integration of the Borsa Italiana Group. First, we successfully completed a key milestone Growth for Impact 2024 strategic plan with the migration of our Core Data Center to new, fully green facilities in Bergamo near Milan. This success paves the way for the forthcoming migration of the Italian cash and derivatives markets to the Euronext state-of-the-art European proprietary trading platform optic by the end of H1 2023.

Also, we moved one step closer to the European expansion of Euronext clearing with the adoption of the value at risk margin metallurgy for fixed income instruments in June and also the derisking of our investment portfolio that we have undertaken in July. This is a very significant set of steps because these two milestones are two important pillars for building the future of European operating -- or the European operating model of Euronext herein.

I would like also to highlight that the contemplated acquisition of the underlying technology powering MTS and Euronext securities Milan from Nexi's capital markets activities that we announced in June is an important accelerator for the integration of your next leading fixed income trading platform and for Euronext securities Milan. In the second quarter 2022, we delivered EUR8.9 million of additional synergies in relation to the acquisition of the Borsa Italiana Group. These additional synergies are mainly related to the first phase of revenue synergies arising from the successful migration of Euronext Core Data Center.

With regards to the targeted synergies related to the acquisitions of the Borsa Italiana Group and to the integration, we have now reached EUR24.1 million of cumulated run rate EBITDA synergies at the end of the second quarter. In other words, we have already achieved 25% of the targeted synergies four quarters after the closing of the acquisition. In total, we spent EUR36.7 million of cumulative implementation costs incurred at the end of the second quarter 2022. Out of which, EUR5.4 million were spent this quarter.

Moving to Slide six. We are very proud to have completed this unprecedented migration of Euronext Core Data Center from Basildon in the U.K. near London to the Aruba Cloud data center in Bergamo near Milan in Italy, only 14-months after we first announced it in April 2021. Of course, beyond the strong rationale for relocating the Euronext Core European trading activities within the European Union following Brexit, this new best-in-class facility presents several very interesting business opportunities. It allows us to control and directly manage our core IT infrastructure, as well as to offer colocation services to our client, which were previously outsourced. The new revenue generated through colocation services are booked under the Euronext Technology Solutions business line. And the synergies-related to this Core Data Center achieved this quarter represent a first phase of synergies, with more services to come in 2023.

The new core data center also represents a big advancement of our fit for 1.5 degree climate commitment. Because it is 100% powered by renewable energy, most -- much of which is self-produced through a large photovoltaic system and hydroelectric unit. It therefore allows Euronext to reduce the carbon footprint of the company, while also enabling colocation clients to lower their own environmental impact. This migration contributes materially to the achievement of our science-based climate target.

Moving to Slide seven precisely on our climate commitments. As you may know it, in June, we disclosed our detailed greenhouse gas emission reduction targets, which are in line with the Paris Agreement and based on the principles of the Science-based Targets Institute. Concretely, we aim to reduce Euronext Scope 1 and Scope 2 market-based greenhouse gas emissions by 70% by 2030, compared to the level of 2020, with further plans to reduce Euronext Scope 3 travel emissions by 46.2% by 2030, compared to the level of 2019.

We recognize that the transition towards a more sustainable financial ecosystem is only possible if we do it collectively. Therefore, we will require Euronext suppliers, which represent 67% of Euronext greenhouse gas emission, to set their own Scope 1 and Scope 3 emission reduction target by 2027.

These ambitious objectives will be achieved. And I want to stress that these ambitious objectives will be achieved without any purchase of offsetting credit in any way whatsoever. The ambition will be achieved to a performance transformation of our operations, mapped with tangible actions targeting Scope 1, Scope 2 and Scope 3 emission. And those include energy efficiency upgrades, the decommissioning of our vehicle fleet and the implementation of a sustainable travel program.

Moving to Slide eight. Lastly, let me turn the spotlight on the successful launch of Euronext Tech Leaders initiative, which we launched last month, together with a network of 13 European and international key partners. The European-wide program consists of several complementary stand: first, the newly created market segment, with more than 100 tech leaders listed on Euronext market, representing more than EUR1 trillion of aggregated market capitalization; second, a full suite of services, providing visibility, communication and promotion of the tech leaders for international investors, and improved trading conditions, notably for retail investors; third, the creation of a community of European tech leaders within Euronext market; and finally, an enlarged pre-IPO services offerings for technology companies.

Following the kickoff of the Tech Leaders Initiatives, two new companies have already joined the segment via their listing on Euronext market. DE NORA which listed in Milan in June, and Deezer which is in July on Euronext Paris. We have early July launched the Euronext Tech Leaders Index, tracking the performance of the 110 companies within this segment. Thanks to this initiative, we are now more than ever positioned to support today's and tomorrow's financing of the growth of Euronext -- the growth of European unicorns.

I now hand over to Giorgio Modica for the review of our second quarter performance.

[Giorgio Modica, Chief Financial Officer]

Thank you very much, Stephane, and good morning, everyone.

I'm now on Slide 10. In the second quarter of 2022, Euronext's consolidated revenue and income grew 2.3%, compared to the second quarter of 2021, underlying revenue pro forma for the acquisition of the Borsa Italiana Group. Please note that this excludes EUR6.5 million of non-underlying transitional income related to the acquisition of the Borsa Italiana Group in April 2021, i.e., prior to the closing of the acquisition.

On a reported basis, income revenue grew 14% to EUR374.7 million, representing an increase of EUR45.9 million. On a like-for-like basis, which means excluding pretty much the Borsa Italiana consolidation, Euronext's consolidated revenue was up 2.4%, compared to the second quarter of 2021. These solid results were driven by the growth of our non-volume-related business and trading operation. Trading revenue increased to EUR129.2 million, up 3.7% pro forma and 14.6% on a reported basis, resulting from a dynamic activity in all asset classes, strong revenue capture and a good performance of the fixed income business.

Post trade revenue increased 1.8% pro forma and 12.6% on a reported basis to EUR93.9 million, driven by the continued strong activity in clearing, exceptionally high level of net treasury income and a good performance of Euronext securities, despite the normalizing settlement environment. Advanced data service revenue increased to EUR52 million, up 2.4% pro forma and 11.9% on a reported basis due to a solid core data business performance.

Listing revenue grew 7.8% pro forma and 15% on a reported basis to EUR55.4 million, demonstrating the resilience of the business and the attractivity of the offering. In terms of revenue mix, this quarter, non-volume-related revenue accounted for 59% of total group revenue versus 60% pro forma the same quarter last year, demonstrating the weight of our non-volume-related activity even during periods of high volatility in volumes. Lastly, non-volume-related revenue covered 144% of our underlying operating costs, excluding D&A, compared to 150% pro forma last year.

Let's move now to the next slide for listing. Listing revenue was EUR55.4 million this quarter, an increase of 7.8% on a pro forma basis and 15% on a reported basis, compared to the second quarter of 2021. As I already mentioned during our last call, according to the principle of IFRS 15, admission revenues are recognized over a period of time, which for Euronext mostly ranges between three and five years. As a result, this quarter, we continue to benefit from the exceptional level of activity we recorded last year in 2021.

In detail, during the second quarter of 2022, Euronext maintained its leading position in Europe for primary equity listing, counting 19 new listing in a challenging environment. This quarter, EUR1.1 billion was weighed on Euronext primary markets, which represented more than 50% of the total money raised on primary markets in Europe.

As far as secondary issue are concerned, EUR11.1 billion was raised in the second quarter of 2022. Euronext also reinforced its position as the leading venue for bond listing worldwide, with over 52,000 bonds listed across all Euronext markets, and continuous growth of our ESG bond listing franchise. This quarter EUR241.7 billion in net was raised on Euronext markets. Overall, this brings us to a total of EUR253.8 billion raised in equity and debt on Euronext market in the second quarter of 2022.

Now moving to the next slide. Before dipping dive into the financial performance of our trading business, I would like to spend a minute and walk you through the different metrics demonstrating the superior market quality of our cash market. This quality is even more emphasized during periods of high volatility. Throughout the COVID crisis, we observed a much more resilient liquidity environment on Euronext market, compared to competing MTFs, where liquidity faded as soon as volatility started to spike.

During the last two quarter, Euronext maintain its position as the largest, deepest and most stable single liquidity pool in Europe, offering the highest quality of execution to its market participants. On average, during the second quarter of 2022, Euronext recorded that EBBO present on blue chip stocks that was 20% higher than the one of any competing MTF. The difference becomes even more visible when looking at the EBBO setting, which was 4 times to 5 times higher on average at Euronext versus the multilateral trading facilities.

Another indicator of our market quality are the lower markouts, thanks to the heterogeneity of investors in our market, which provides a much healthier liquidity environment than competing MTFs. Lastly, I would also like to stress that even during periods of volatility, which generally lead to widening of spreads across European equity markets, Euronext maintain the lowest average spreads, compared to the other markets.

Let's move now to the financial performance of our trading business next on Slide 13, and let's start with trading. On a pro forma basis, including Borsa Italiana, ADV increased by 3.3% to EUR11.6 billion, supported by a volatile trading environment. Average revenue capture over the quarter was at 0.51 basis point, resulting from an active management, and the market share averaged 67.1%, both including cash markets in Italy. Cash trading revenue increased 1.4% pro forma and 7.4% on a reported basis to EUR75.3 million.

Moving on to derivatives. Derivatives trading revenue was up 8.3% pro forma and 14.3% on a reported basis to EUR14.9 million, due to lower volumes, but higher average fees mainly linked to a better mix of products. Pro forma average daily volumes on financial derivative was down 4.7% from the second quarter of 2021, reflecting a decrease in equity future and option trading. Commodities pro forma average daily volume decreased 4.4% this quarter, reflecting the high price environment for agriculture commodity derivatives. On the other side of the quarter, the average revenue capture for derivative reached EUR0.32 per lot, as I said, mainly thanks to a mix effect.

Lastly, on to fixed income trading. Fixed income trading reported revenues at EUR24.9 million, primarily resulting from the consolidation of MTS. On a pro forma basis, fixed income revenue increased 2.4%. In the second quarter of 2022, MTS cash generated EUR16.6 million of revenues and MTS Repo generated EUR5.4 million of revenues, in a market dominated by increasing interest rates.

MTS cash posted a solid performance, mainly thanks to the very high level of activity in the first two months of the second quarter. And ADV record at EUR22.7 billion, down 16.8% versus a very strong second quarter of 2021. MTS Repo trading saw a strong traction this quarter, with term adjusted ADV up 25% to EUR347.5 billion.

Continuing with trading, let's move on Slide 14. The second quarter of 2022 saw a strong performance for Euronext FX in terms of both revenue and average daily volumes, thanks to the positive impact of volatility. Euronext reported average spot effect trading volumes of EUR23.6 billion, up 27% compared to the second quarter of 2021. Spot effects trading revenue increased 27.6%, compared to the second quarter of 2021 at EUR7.3 million. Our trading reported EUR6.9 million in revenue, a growth of 3.4%, compared to the same quarter last year as a result of a larger footprint of Central Europe and in the U.K. and a very strong position in the Nordics in the second quarter of 2022.

Average daily day ahead power traded was 2.52 terawatt hour, with an increase of 15.9% versus the same quarter last year. And average daily intraday power traded was 0.09 terawatt hour, up 27.5% compared to the second quarter of 2021.

Moving to Slide 15. Revenue from our post-trade activities, including net treasury income, increased 18%, EUR109.6 million. Clearing revenue was up 18% this quarter and 5.5% on a pro forma basis to EUR31.4 million, resulting from the volatile trading environment as well to the higher treasury income from LCH SA. On a like-for-like basis, clearing revenue was up 4.1% year-on-year. Net treasury income through the CCP business of Euronext Clearing reached an exceptionally high level of EUR15.7 million. This performance reflects a very high level of margin posted over the quarter and should not consider as a stable one.

But let me further develop on the net treasury income. In line with the road map to make Euronext Clearing a leading European clearinghouse, we decided to take step to neutralize the expected impact of interest rate variation on our net trading treasury income going forward. Euronext Clearing held a portfolio of fixed income security of approximately EUR4 billion to EUR5 billion, with a 12-month average maturity. This portfolio represented approximately 25%, 30% of the margin collected from clearing members, while the rest was deposit at variable rate, mainly at ECB.

In the context of the increasing interest rate, we decided to progressively exit our investment portfolio. In particular, Euronext Clearing disposed the part of its portfolio maturing after the 1st May 2023, which represent approximately 50% of the overall portfolio, while it will hold until maturity the rest of the portfolio. This means that at beginning of the second quarter of 2023, Euronext Clearing will hold no outright portfolio investment portfolio.

This decision will have the following implication. The surplus regulatory capital of Euronext is expected to increase. The decrease of regulatory capital requirement for Euronext Clearing linked to the divestment of the portfolio will more than compensate the negative impact on regulatory capital of the EUR35 million let loss resulting from the disposal. This loss will be booked in the third quarter of 2022 as a part of our non-underlying net treasury income. The net treasury income on the margin collected will stabilize then around 20 basis point, except in the fourth quarter of 2022 when we expect a margin of around 10 basis point and in the first quarter of 2023, when we expect a margin of around 15 basis point.

Finally, as the sale of the portfolio will have no negative impact on the regulatory available capital of the Group, Euronext decided that the dividend for the fiscal year 2022 will be adjusted exceptionally to neutralize any negative impact of this operation.

Now let's move back to the business performance of the quarter and move to the custody and settlement. Custody and settlement and other post-trade revenue encompassing the activity of the four CSD we operate under Euronext Securities brand was up 10.1% to EUR62.5 million on a reported basis. The performance illustrates a significant contribution of Euronext Security Milan and a diversified business model, enabling to capture value in the context of normalizing settlement activity. On a pro forma basis, revenue is up 0.1%.

Moving to Slide 16. Advanced Data Service revenue was up 11.9% to EUR52 million, this represent a 2.4% increase on a pro forma basis, compared to the second quarter of 2021, driven by strong traction of our Core Data business. Investor Service revenue was at EUR2.3 million in the second quarter of 2022, up 4.9%, reflecting the continued expansion of the franchise. Lastly, on Technology Solution, revenue was up 5.6%, compared to the second quarter of ‘21 to EUR24.1 million as a result of the consolidation of the Borsa Italiana Technology business. On a pro forma basis, Technology Solution revenue decreased 8.4%.

Moving to Slide 18 for the financial highlights of the quarter. I would like to start with the EBITDA bridge. Euronext adjusted EBITDA for the quarter was up 12.3% to EUR221.7 million. On a pro forma basis, adjusted EBITDA was up 2.5%, demonstrating our ability to capture value and maintain our trademark cost discipline. Please note that the increase of cost in the second quarter of 2022 is not linked to inflation, but to the post-pandemic context. The normalization of the context triggers higher costs linked to be back at the office, higher travel and marketing expenses.

The adjusted EBITDA margin slightly decreased to 59.2% this quarter from 60% the same quarter last year. On a like-for-like basis, EBITDA margin was 58.3% this quarter and adjusted EBITDA increased 1.7%. Finally, the non-underlying costs, excluding D&A, are mainly linked to the integration of Borsa Italiana.

Moving to Slide 19 for the bridge on net income. Net income increased this quarter 37.2% to EUR118.9 million. On a pro forma basis, the net income increased 25.6%, resulting from the following elements. Pro forma EBITDA grew EUR23.8 million, as we just discussed. D&A was broadly in line, with a slight increase of EUR0.5 million. The net financing income is down versus last year as it is not impacted by the cost of the bridge financing for the acquisition of Borsa Italiana, I would like also to highlight that we exited the swap we had on our EUR500 million inaugural bond. This means that now 100% of our debt benefit from fixed and very competitive terms.

Results from equity investment decreased by EUR1.1 million. As exceptionally, in the second quarter of 2021, we received the dividend of Sicovam, not distributed in 2020, due to the pandemic situation. I would like to highlight as well that the non-underlying costs in the bridge are mainly represented by DNA, namely the PPA amortization of our acquisition.

Lastly, income tax for the second quarter of 2022 was EUR45.2 million. This translated into an effective tax rate for the quarter of EUR27.1 million. Adjusted for non-underlying costs, adjusted net income was EUR143.2 million. And adjusted EPS is down 6.1% to EUR1.43 per share this quarter. If we look at the performance of the first six months, adjusted EPS is at EUR2.89 per share, up 0.6% versus the first six months of last year at EUR2.87 per share.

Moving to the next slide, Slide 24, the cash flow generation and leverage. Net operating cash flow amounted to EUR76.8 million. Excluding the impact on net working capital from Nord Pool and Euronext Clearing, net operating cash flow accounted for 42.1% of EBITDA, impacted by the seasonal payment of taxes.

I would like to remind that there are specifically high tax outflows in France and Italy in the second quarter of the year. Our net debt-to-EBITDA ratio was 2.4 times in the second quarter of '21 at the end, slightly up compared to the previous quarter, reflecting the payment of the 2021 dividend, partially offset by the cash flow generation of the period.

Moving on to Slide 21, for the evolution of our liquidity position over the quarter. I would like to highlight that our liquidity position remains strong, above EUR1.3 billion, including the undrawn RCF of EUR600 million, and excluding the cash currently in Transit and Nord Pool.

That's it for me. And with this, I would like to give back the floor to Stephane.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Thank you, Giorgio. I would like to -- before moving to the Q&A, I would like to emphasize that our 2022 dividend will not be impacted negatively by the change in our investment portfolio policy and will be adjusted accordingly, as Giorgio said, I'm now available for your questions, together with Giorgio Modica, Anthony Attia and Simon Gallagher.

[Operator]

Thank you. [Operator Instructions] And our first question comes in from the line of Kyle Vytorin from KBW. Please go ahead.

[Matt Moon, KBW]

Hi, good morning. This is actually Matt Moon on for Kyle Vyt. I just had one on the Euronext Clearing investment portfolio rundown by the first quarter '23 end. Just to be clear, can you just clarify the size of that contribution to NTI? Is that the entirety of that NTI line? Or will there still be a portion of the margin that will be invested in shorter duration, if not overnight rates?

And could you provide a little bit more detail on how much capital this actually frees up for you on an ongoing basis as well? And maybe just expand upon the broader rationale for the decision. It sounds like it's related to reducing interest rate volatility. But just wanted to hear your thoughts -- expanded thoughts there. Thanks.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Giorgio?

[Giorgio Modica, Chief Financial Officer]

Yes, absolutely. So what was implicit in what I just described is the proceeds of the disposal are going to be invested at TCB at variable rate. So what we're going to see is that progressively, the 25%, 30% that we were investing in fixing some security are going to gradually reduced to zero, which means that everything is going to be invested at variable rates.

So what are the steps? The first step, as I said, is that we did cut the position by two. So we moved from 25% to around 10% invested in fixed income securities. And then in the next six, seven months, this position will gradually go to zero. And at that point in time, the result of our investment are going to be completely at variable rate. So the logic is simply as we are entering a phase of expected increase of interest rate, and the number of hikes between now and the next couple of years can be significant. We wanted to have a portfolio that better reflects the current environment. So as I said, I already commented on the level that this new strategy will provide around 20 basis point. And as well in terms of size, I believe that I covered that as well, the portfolio was in between EUR4 billion and EUR5 billion. Now it's divided by two. And again, by the beginning of next year, it's going to be zero.

[Matt Moon, KBW]

Okay, great. Thank you.

[Operator]

The next question comes in from the line of Haley Tam calling from Credit Suisse. Please go ahead.

[Haley Tam, Credit Suisse]

Good morning. Thank you for taking my questions. Can I have three, please? Two on synergies and one on fixed income. Firstly, on the synergies from the data center migration, can you confirm whether all of those synergies are now affected in the EUR8.9 million annualized benefit you saw in Q2? Or is there still further opportunities to capture from the extra services you can offer to your users?

Secondly, Nexi, Capital Markets Technology business. You said it'd be an accelerator of integration of MTS fixed income and Euronext Securities Milan. Are there any further comments on the likely timing and scale of the additional synergies from that acquisition?

And then the third question, just on fixed income, I guess, both from a listing and a trading perspective. Can you give us any idea of what you might expect in terms of the impact on trading and listing of the current environment? So I guess I'm thinking about the political uncertainty in Italy, the rising ECB rates, the end of the pandemic emergency purchase program and also the new transmission protection instruments. I guess there's a lot going on. Your help to understand how this might impact you would be very much appreciated. Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Maybe, Anthony, you can answer on the outlook for the listing business considering the macro environment. And Giorgio will answer your question on synergies and on the Nexi capital markets position.

[Anthony Attia, Global Head of Primary Markets and Post Trade]

Thank you, Stephane. Good morning, Hal. Your question was about the bond listing business in Europe. So we have several observations we can share with you. The first one is the current environment has significantly slow down the CLOs program, the collateral loan obligation program, so that's the first impact. Now from a corporate bond point of view, we see a sustained demand so far. And so it's -- we don't see any negative impact. And obviously, from the point of view of the sovereign debt, there is a significant activity.

[Giorgio Modica, Chief Financial Officer]

Yes. First, I wanted to start because I now remember that I missed the part of the previous question. So when it comes to capital release, I cannot be super specific, but I can give you an order of magnitude. We are talking of high single-digit million euro in terms of capital release net loss. The second element on the synergies, the EUR8.9 million are for the vast majority linked to the transition of the data center, but are not 100% linked to that. We expect further synergies in the course of 2023 related to that activity. And overall, we're expecting a number of synergies coming from the data center, which is of around EUR10 million.

And then when it comes to the next question, which is around the acquisition, the transaction is not yet closed. We confirm that we expect the transaction to close by the end of the year. It's too early to give more details. But we confirm that we expect this transaction to generate a positive return and in line with our cost of capital.

[Haley Tam, Credit Suisse]

Thank you.

[Operator]

The next question comes in from the line of Arnaud Giblat calling from BNP Paribas. Please go ahead.

[Arnaud Giblat, BNP Paribas]

Good morning. I've got three questions, please. You helpfully gave guidance on the future net interest margin to be expected. I'm just wondering if you could talk about the drivers of cash balances and what the sensitivities are to different market inputs.

Second, you're running quite a bit ahead of your cost guidance if I annualize H1. Are you expecting a significant step-up in investments for H2 to get you to your guidance? Or more -- or is the upside risk there? And finally, I hear that there might be some realignment of pricing in Italy. It's coming up soon. Is that something you can confirm? And could you maybe quantify the upside risk there? Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Arnaud, could you -- this is Stephane. I believe I got it. Can you rephrase your first question, because it was not very clear to me? The second question on the cost guidance and the third one on pricing was very clear, but the first one was not clear to me.

[Arnaud Giblat, BNP Paribas]

Yes. No. So the guidance you gave on net interest margin is pretty clear, 20 basis points once you've disposed your portfolio. I'm just wondering how to think about cash balances. What are the drivers for that to think about? What are the macro inputs?

[Stephane Boujnah, Chairman and Chief Executive Officer]

Okay. So Giorgio.

[Giorgio Modica, Chief Financial Officer]

Absolutely. So there are three elements to the question. One element is clearly the volatility of the market, because the more volatile, the more -- the risk model command for a higher level of collateral from clearing members. And it is under clearly -- is difficult to predict. But assuming a situation that stays as it is today, we should expect a relatively high level of collateral. If I look in the last 12, 24 month, the range of collateral required is around -- in between EUR15 billion and EUR22 billion, this is what we have recorded.

Then going forward, there are going to be a number of moving part. And clearly, I can comment on the situation, pre-expansion of services provided by Euronext Clearing to the Euronext market. So we have announced migration to a change to the VAR model. This will have a slight impact, which is single-digit, but it's difficult to be quantified the next year. So the more precise range that I can give to you is that in the past, we have had between EUR15 billion and EUR22 billion. The impact on VAR should not be disproportionate on those level. And if the level of volatility is going to remain high, we should expect to have high level of collateral.

Then on your second question around the cost, we did reduce by EUR10 million last quarter. The target, we are holding up well to achieve that. And this quarter, we don't feel comfortable in changing that. We will clearly, as always, reassess. Then the final point on fee changes, I wouldn't call it fee changes. Clearly, as you know, next year, we're going to migrate to a new technology. And we will look at some form of harmonization between the fees across our markets. The impact of that, we will -- it's too early to comment.

[Arnaud Giblat, BNP Paribas]

Thanks.

[Operator]

The next question comes in from the line of Mike Werner calling from UBS. Please go ahead.

[Mike Werner, UBS]

Thank you very much for the presentation. Just one question. We've seen Europe developing or in the process of trying to develop a consolidated tape for the markets here. I just wanted to get your view on that and what the potential impact could be to Euronext? Thanks.

[Stephane Boujnah, Chairman and Chief Executive Officer]

We are in intense conversations with all the relevant constituencies involved in those debates. At this particular moment, the debate is on the table of the Council of the European Union and at the European Parliament. There is a proposal in the table from the European Commission. There is an initial view from the reporter in the Parliament. We do believe that there is still room for flexibility, because clearly, there is a misunderstanding at this stage about what is the core -- what are the core fragmentation issues. And the core fragmentation issues in Europe are with the OTC derivatives, ETFs and fixed income, not with equity markets. So these discussions are ongoing.

Clearly, it's too early to tell what would be the implications for Euronext, because we don't even know whether it will be a post-trade consolidated tape, a pre-trade consolidated tape, a real-time consolidated tap. Beyond the phrase consolidated tape, you have plenty of solutions that will have fundamentally different implications, not only for Euronext, but for the full market. And also, these discussions are taking in parallel to other discussions about the market architecture and the future of systematic internalizers and the rules applying thereof. So it's really, really too early to give a final care to provide you something that you could put in your model because it was in progress.

[Mike Werner, UBS]

Thank you.

[Operator]

The next question comes in from the line of Benjamin Goy calling from Deutsche Bank. Please go ahead.

[Benjamin Goy, Deutsche Bank]

Yes, hi. Good morning. Benjamin Goy from Deutsche Bank. Just one major question left, and sorry to stand at one of these conference calls. Because your yield management was again very good, so I just was wondering, because there seems to be a recurring element, what is the outlook here? And are you more positive on a sustainably higher rate in cash equities going forward? Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

So I'll leave the floor to Simon Gallagher, the Head of Cash and Derivative Markets.

[Simon Gallagher, Head of Cash and Derivatives]

Thank you for your questions. So as we said, the robust yield management at Euronext is a result of a highly segmented pricing strategy. And the outlook for the yield management is broadly stable over the next quarters. And as Giorgio said, there'll be opportunities with the onboarding of the Italian markets for further segmentation and yield management.

[Giorgio Modica, Chief Financial Officer]

Maybe a follow-up comment on my side. You might remember in the past, we guided for a 0.50 basis point. That was Euronext standalone, the 0.51 we're posting today includes the durative impact from Borsa Italiana. Just to clarify that.

[Benjamin Goy, Deutsche Bank]

Yes. And should we then take the 0.51 as the run rate going forward? Or what was the stability we're referring to?

[Giorgio Modica, Chief Financial Officer]

I mean, what I would say is that if we look at the previous quarter at 0.47, we were -- in Euronext term standalone, we were ahead of the target of 0.50 on a stand-alone basis. So I would look at the 0.51 as a high number. So I guess, standing slightly below 0.5 is something that is a sustainable longer term.

[Benjamin Goy, Deutsche Bank]

Understood. Thank you very much.

[Operator]

The next question comes in from the line of Johannes Thormann calling from HSBC. Please go ahead.

[Johannes Thormann, HSBC]

Good morning, everybody. Two questions from my side left. First off, on the net interest margin in the Clearing business. Do you -- just because it was not clear to me, do you keep it flat at 20 bps? Or also, do you want to benefit from future ECB rate hikes?

And secondly, on your agriculture trading activity, it looks a bit counterintuitive that the volumes continue to trend down. As normally with higher prices, trading activity goes up, also in other commodities like oil and gas. Okay, you can also hint to power probably where the effects are mixed. But normally, you would say historically high prices trigger higher activity. So what is your reason or your thinking why those volumes are so weak? Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Giorgio?

[Giorgio Modica, Chief Financial Officer]

Yes. So starting with your second question -- on your first question. So the idea, and what we're going to implement is pretty simple, a variable -- fully variable liability and fully variable assets. So the 20 bps are going to be independent of the level of interest rate as long as, at least, but it's too early to tell, and we don't see that coming in the short future, the situation will stabilize.

Your second question on commodities. You need to consider several elements, including the seasonal effect, and the fact that the harvest season is happening in the third quarter. So you should not look directly at the second quarter as a good proxy of what could happen going forward.

And final comment in this respect, that we remain mainly a physical market, which means that the significant portion of the trading is done by not by the financial player, but by farmers hedging the product. And this gives us to a certain extent a limitation to the volumes. But again, you should look at the evolution of volumes, considering that -- especially milling wheat is a seasonal activity and a seasonal business. And in the third quarter, we have a good sign that seems to point out that the third quarter, which is, again, the harvesting is going to be a good quarter.

[Operator]

Thank you. The next question comes in from the line of Ian White calling from Autonomous Research. Please go ahead.

[Ian White, Autonomous Research]

Hi, good morning. Thanks for the presentation. Thanks for taking my questions. I also had three, please. First of all, on the previous call, I think you said with regard to the medium-term revenue guidance of 3% to 4% that you were kind of considering whether that was still the right range, and you might think about coming back to us with an update on that. Just wondered if you could provide latest thoughts around whether that 3% to 4% is still the correct range, please.

Secondly, just in terms of the IPO market. I acknowledge the points you made about market share. But obviously, IPO market has been very weak across Europe in the first half of the year. Is there anything you can say in terms of the pipeline, for example, that you see in terms of appetite to issue on Euronext markets when conditions normalize?

And just final one on regulation again. There seems to be some discussion at the sort of European level about regulation for dark pools, and in particular, scrapping the double volume cap mechanism to sort of stave off competition from the U.K. effectively. Just wondered if you could share any thoughts around that too, please, and the impact you might see on Euronext markets.

[Giorgio Modica, Chief Financial Officer]

Yes. Basically, the limits on dark pool trading were to be removed?

[Ian White, Autonomous Research]

Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

I'll take the third question and second question and Giorgio will cover the question on the top line guidance. On the regulatory questions, as I told on the consolidated tape issues, the discussions are ongoing. The discussions you are referring to are part of a debate on the market architecture relating in part to the future of systematic internalizers. Whatever the solution will be will be a package deal consolidating the -- all the parameters of the debate, the future dark pool, the future of systematic internalizers, the future of consolidated tape, if any. So I think it would be totally speculative and artificial and unstable to make any comments about the likely consequences of that particular discussion at the moment.

On the IPO markets, we are in a situation which is ambivalent. On the one hand, there is definitely a post in a number of listing. But the IPO market is not closed. Since the beginning of the year, we had 41 listing on Euronext market, which compares to 104 last year. This is not as dynamic for sure, but this is not a closed market. It's a market where -- which is more selective and where many issuers are postponing their project.

What is really interesting is that Euronext remains the venue of choice for listing, in particular, for international listing. When you compare the numbers of listings on Euronext since the beginning of the year with the other European venues, you have 41 listing on Euronext since the beginning of the year. You have 19 on the London Stock Exchange and 3 on Deutsche Borse. And when it comes to international listings, i.e., listings from companies that are not from issuers that have their legal headquarter within Euronext countries, we had 10 of those listings out of 41, whereas there were only four non-U.K. listing in the London Stock Exchange since the beginning of the year and two at Deutsche Borse.

So my point is that the competitiveness of Euronext as the venue of choice for listing, in particular, for international listing in Europe is there, just because we now have 25% of the equity traded in Europe that are trading on Euronext market. And we have now the deepest liquidity pool and the deepest aggregate market capitalizations. It's between EUR6.4 trillion and EUR6.8 trillion of aggregate market capitalization that you find on Euronext market, compared to -- which is approximately twice the size of the aggregate market capitalization of companies listed on the London Stock Exchange and approximately 3 times the size of the Deutsche Borse aggregate market capitalization. So this is the venue of choice big time.

And I just want to underline that 50% of the listings this year were tech companies. And with the initiatives we have launched, the Euronext tech leaders initiative, we are seeing a momentum and appetite for technology companies in Europe that consider that this segment, this European tech leader segment, is now the place to list when you are a technology company in Europe. That's why we had already just in the past few weeks two tech listings, one in Milan, one in Paris, in this segment. So we are confident that despite the current volatility, uncertainty on pricing and valuation, the fundamental pipeline is there. Companies are there. Appetite of investors is there. It's just that volatility makes standard IPO process more complicated than when the outlook is more predictable, so I'm confident.

Giorgio, on the top line?

[Giorgio Modica, Chief Financial Officer]

Yes. And maybe last time around, there was a slight misunderstanding that I wanted to clarify. So it's clear that we are always looking to give to the market the most accurate targets. But I didn't mean that every quarter, we would have reopened the topic on long-term target. Again, it's not even 12 months since the beginning of -- when we launched the Investor Day. And the market situation is such that we believe that it is not the right moment to do that. And it might not be the right moment even next or the following one. So we will proactively communicate when we believe that the conditions are such to update this target. But again, I was not intending to give an update this quarter. Thank you.

[Ian White, Autonomous Research]

Thanks. Appreciate it.

[Operator]

The next question comes in from the line of Tobias Lukesch calling from Kepler Cheuvreux. Please go ahead.

[Tobias Lukesch, Kepler Cheuvreux]

Yes. Good morning, also three questions from my side, please. First, again, on the disposal of the investment books. Just out of curiosity, were you in discussions with the regulators about that investment portfolio? And to understand the mechanics basically of the net interest income, so you're charging 20 bps as a base, if I understand you correctly, which at a EUR20 billion cash balance makes a kind of EUR40 million per year. So -- and if the ECB rates were to rise into a positive territory, i.e., 25%, would that imply kind of a 5 bps top-up basically on the whole amount?

Secondly, on the squeeze of the sub-CSDs, can you quantify basically the positive impact on your business from that side?

And thirdly, on the listing again, how should we think about the revenue line development in ‘23 given the lower share prices in general and the fact that it's -- the base is also for your fees? I mean, with IFRS, I know you kind of smoothed these revenue generation. So should we rather expect to continue to see solid growth in '23? Or might there be a little bad surprise on that side? Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Tobias, can you repeat the second question, which was not very clear?

[Tobias Lukesch, Kepler Cheuvreux]

On the squeeze of the sub-CSDs? Yes, I mean, in that market, I mean we realize, especially also some of the countries where sub-CSDs providers go out of business, basically and where the business is then shared between primary clients, be it a big investment bank and you guys, to favor potentially of the client. But there, I think there's a chunk of business also that flows then in your P&L. And I was just wondering if this is something which moves the needle a bit on the revenue outlook and growth potential.

[Stephane Boujnah, Chairman and Chief Executive Officer]

So I'll take the questions on the listing and on the fees. And Anthony will take the question on CSDs and Giorgio will answer on the regulators on the NTI. So clearly, our listing fees are not massively driven by underlying valuations. So in general, the underlying valuation is not affecting our listing policy revenues. So that's clear. So I'll leave the floor to Anthony to complement that point or to provide additional nuances and to cover the CSDs point.

[Anthony Attia, Global Head of Primary Markets and Post Trade]

Thank you, Stephane. Just to complement the yearly fees on equity listing, the valuation that is taken into account is the one at the year-end. And so that gives you an idea of the impact of the evolution of the valuations. But so currently, the revenues that we declare are both impacted by IFRS 15, obviously, as you said, the virus. But also they are capturing the market situation at the end of last year. On your CSD question.

[Tobias Lukesch, Kepler Cheuvreux]

Sorry. And that I was just wondering, looking into next year, if this is a kind of a linear approach we should apply i.e., market down 10%, listing down 10%? Is that something we can assume? Or would that be penalizing you too much?

[Anthony Attia, Global Head of Primary Markets and Post Trade]

No, no. First of all, we don't want to provide any kind of forward-looking view on this. But again, the level of reported leasing fees capture the IFRS 15 element. And also, we have a fee adjustment that are done in order to remain close to the market. So we -- your statement is not correct.

And now on the Nordic CSD situation, as you pointed out, there are some changes in the ecosystem in the Nordic countries around the value chain. As we explained during the Investor Day last year, we are working with our clients to capture some of these changes and deliver some services as an outsourcing partner. So this is the development of post-trade services in the Nordics. Also, you might have seen that we have published a news about some significant U.K. custodian becoming a direct client of Euronext Securities Copenhagen. This is also part of these changes. So for our CSD business, the trend is positive on that particular topic.

[Giorgio Modica, Chief Financial Officer]

Yes. So on my side, just an additional element on listing. It is important to highlight that the equity annual fees represent 25%, 30% of the total revenues. So it's a relatively small portion. And as Anthony said, a decrease in market capitalization is not equally reflected in a decrease on the revenue capture.

So on the NTI, another element to clarify, our decision is a decision of value maximization. It has nothing to do with regulatory approval, et cetera. So we always operate within the boundaries of what we can do. We are only adjusting our investment strategy to an evolving market condition. And the result of that is that, as this part of the clearing business is, in fact, the spread business, we -- this is the margin that we will apply, having assets and liabilities at variable rate. So just -- I take the opportunity of your question to say that, again, this decision has nothing to do with funding workforce. It's a decision of maximization. We don't want to take any risk. Our clearing houses are more than sufficiently capitalized. And actually, as I said, this decision will further increase the level of regulatory capital available. So it's more of a business decision than anything else.

[Tobias Lukesch, Kepler Cheuvreux]

Understood. Thank you, Giorgio. But sorry for asking again here. If the ECB rates go to 50 bps, do we then have a 50 bps on the cash balances? Or how would that move?

[Giorgio Modica, Chief Financial Officer]

As the asset and the liability will be linked to the same variable rate, is going to be indifferent. If the ECB will go up to whatever level, then we would pay and receive the same variable element on asset and liability. And therefore, the spread would remain the same. The only part for which this is not true is, on a temporary basis, between now and the moment where we will have completely run down the portfolio. And this is the reason why I gave specific guidance with respect to the level to expect in the fourth quarter this year and in the first quarter next year. But then from that moment on, again, the 20 basis point are going to be independent on of the ECB decisions.

[Tobias Lukesch, Kepler Cheuvreux]

Very clear. Thank you

[Operator]

Thank you. That was the final question in the queue. So I shall hand the call back across to yourself, Stephane Boujnah, for any concluding remarks. Thank you.

[Stephane Boujnah, Chairman and Chief Executive Officer]

Thank you very much for your time. Have a good day.

[Operator]

Thank you for joining today's call. You may now disconnect your handsets.