As a country, the grand duchy of Luxembourg is a distinctly unusual case, and the same is true of its stock exchange.

Luxembourg was founded in AD 963 by Siegfried, Count of Ardennes, who made a canny exchange of his lands for a small, formerly Roman castle, then known as Lucilinburhuc (‘little fortress’) lying along the Alzette River. Siegfried’s move to this castle marked the beginnings of what became Luxembourg, and the little fortress gave Luxembourg its name.

Until the 1870s Luxembourg was primarily an agricultural country, but technological progress during that decade allowed the grand duchy to begin exploiting its iron reserves, in those days substantial. Luxembourg soon became a major producer of steel. Today Luxembourg, which covers an area of only 998 sq miles (2,586 sq km) and has a population of just under 500,000, enjoys one of the world’s highest GNPs, deriving substantially from its heavy industry and its financial services sector.

As for the Luxembourg Stock Exchange (LuxSE), this is itself something of a little fortress even today, having successfully retained its independence despite most of the world’s smaller exchanges succumbing to being part of the major stock exchange conglomerates.

How has the LuxSE achieved this feat? Mainly through continuing the same tradition of canny exchanges that Siegfried started. The LuxSE was the first exchange to list a Eurobond, with the issue of Italian Autostrade bonds in July 1963. The legendary banker and Eurobond pioneer SJ Warburg was behind that issue; he had asked both the London Stock Exchange and the LuxSE whether he could start listing his new type of bonds at their exchanges; the LuxSE was more helpful and co-operative than London, so it got the business.

Ever since, the LuxSE has been one of Europe’s foremost exchanges for listing Eurobonds, and has often in fact ranked first. Today, the vast bulk of the LuxSE’s activity consists of its work as a listing exchange.
As of the end of March 2010 it listed 30,232 bonds, 6,981 warrants and 7,165 investment funds. Of those investment funds, 7,008 are based in Luxembourg and 157 based abroad, an indication of the scale of the Luxembourg investment industry: the figure represents a fairly astonishing one investment fund per 71 members of the population.

LuxSE listings also include equities, but here the figures are much smaller, with just 34 equity issues originating from Luxembourg and 268 from abroad. The total number of listings on the LuxSE as of March 31 was consequently 44,680, with these listings stemming from issuers in more than 100 countries. In fact, the number of securities listed has decreased over the past year or so due to the economic recession; it was around 49,000 until the onset of the credit crunch.

Historically sound
The substantial listings business that the LuxSE has won due to its historical and current expertise in this area is reflected in that 135 staff work at the exchange: a much higher figure than at exchanges in other countries (such as Malta, say) that are of comparable size. Prior to a listing being granted, the LuxSE checks that all the prerequisites that will allow a secondary market to develop are fulfilled. Listed securities are registered with an ICSD and have access to the NYSE Euronext’s UTP trading platform. This means that listed securities are not simply listed but are also tradable.

Since 2000, the LuxSE has co-operated with Euronext N.V., now a subsidiary of NYSE Euronext, with the co-operation including a cross-membership agreement. Under the terms of this agreement, members of the LuxSE may access the Euronext trading system, while Euronext members who qualify for a European passport may access the markets of the LuxSE.

As well as this, the co-operation has involved the migration in May 2007 of all Luxembourg securities to the NYSE Euronext’s Universal Trading Platform (UTP). The co-operation has additionally led to the adoption in February 2008 by Euronext of the SAGE application for the listing of corporate bond issues. SAGE (no relation to the famous software system) has been developed by the LuxSE.

Altogether, these changes led to the launch of the Luxnext standard for corporate bonds. Luxnext is a European Economic Interest Grouping between the LuxSE and Euronext. It aims to offer a European standard for the listing and trading of corporate bonds.

Clearing and settlement at the LuxSE are carried out in conjunction with LCH Clearnet S.A. for clearing and with Euroclear Bank and Clearstream Banking Luxembourg for settlement.

The LuxSE differs from most other stock exchanges in the world in that around 75 percent of its revenue is derived from its listing activities and its trading volumes are quite low. For comparison, NYSE Euronext had, in 2008, just eight percent of its revenue from listings and 52 percent from trading. [Source: Federation of European Securities Exchanges].

A law establishing a stock exchange in Luxembourg was passed on January 30, 1927. The stock exchange, which has always had a corporate status, was incorporated as the Société Anonyme de la Bourse de Luxembourg on April 5, 1928.

The LuxSE began operations in May 1929: on the brink of the global depression and so hardly an auspicious time for a stock exchange to get going. Progress was slow during the difficult economic conditions of the 1930s, and the German occupation of the grand duchy during WWII put a stranglehold on the LuxSE just as it did on the rest of Luxembourg and all of occupied Europe. But with the Nazi defeat, Luxembourg at once started to play a role as an expert and adept facilitator of international networking and co-operation.

Luxembourg’s unusual geographical location, bordered by Belgium to the north and west, France to the south and Germany to the east, helped to further its reputation in this respect. Luxembourg was a founding member of the Benelux Economic Union in 1944, of the European Coal and Steel Community in 1952 and of what was then called the European Economic Community (now the European Union) in 1957. The LuxSE began to expand after the war, but only came into its own with its pioneering activities in Eurobond listings in the early 1960s.

Today, around 60 percent of all European cross-border securities are listed at the LuxSE, with about fifty countries listing at least some of their sovereign debt in the grand duchy. The LuxSE also takes part in the market for debt from the EBRD, the European Commission, the European Investment Bank and the World Bank.

What exactly does the LuxSE offers investors today? A source at the LuxSE was bullish about this and about the exchange’s track record generally.

‘Not only were we the first stock exchange to list Eurobonds but we’ve also been pioneers in listing depository receipts, investment funds and – more recently – sukuk: securities compliant with Shariah law. Also, we were operating an English-language protocol for documentation even back in the 1960s: the Paris Bourse, for example, has only switched over to English in this respect comparatively recently. It’s fair to say that we’ve been a major catalyst for the enormous growth in the Luxembourg banking and financial sector that has led to this industry today being such a vital part of the Luxembourg economy: the LuxSE has inspired the growth in that sector, rather than the other way round.’

The source adds: ‘The LuxSE is today one of Europe’s very top players in bond listings if not the top one. We offer an effective and tried and tested service for bond listings that benefits from our close to fifty years of experience. Our brand is one we’re proud of and we nurture it. Bond issuers going with us know that they can also benefit from our international infrastructure and from the breadth and strength of our associations, such as with Euronext. Bond issuers can in addition enjoy being involved with Luxembourg’s highly developed and immensely experienced banking and financial services community, our multi-lingual business community – with its English, French, German and Luxembourgish – and our global outlook. We are well regulated by the Commission de Surveillance du Secteur Financier (CSSF) and have created a listings environment that facilitates the bond industry’s preferred methodology where listings take place immediately once deals are signed.’

Ultimately, what bond issuers and investors think of the listing and trading opportunities available at the LuxSE are of course a matter of personal choice. But certainly, bond issuers and investors choosing to do business in Luxembourg and benefit from the LuxSE’s experience in listings are in good company.

‘When Manchester United Football Club wanted to tap the market recently, they chose us to handle the listing of their bonds,’ the LuxSE source explains.

Luxembourg, prosperous, glamorous, international and with a history of being at the centre of things, is the sort of place where you might expect James Bond to carry out a mission. But if he did, there’d be other bonds with whom he would have to contend.

More than thirty thousand of them.