On 16 January this year, the Milan Stock Exchange celebrated its bicentenary. It was in January 1808 when, by Napoleon's decree, Borsa Italiana was instituted at the original location of the Monte di Pieta, in the old commercial part of the town. Born as a public institution, and turned into a private joint stock company in 1998, Borsa Italiana has greatly expanded its business over the last 10 years in order to cover all services related to the exchange industry; listing to post-listing, from information services to facility and property management services.

That process of development reached a crucial stage in 2007 by means of Borsa Italiana's merger with the London Stock Exchange (LSE), giving birth to the leading diversified exchange group in Europe.

The strategic alliance between Borsa Italiana and the LSE brings together two highly efficient and complementary businesses, coupling the strengths of the LSE in the UK and international equities with those of Borsa Italiana in Italian cash equities, derivatives, securitised derivatives, fixed-income products and exchange-traded funds (ETFs), as well as in efficient post-trade services.

Specifically, the contribution of the Milan Stock Exchange to the success of the merger can be summed up in numbers as follows.

Over the last 10 years, Borsa Italiana has consolidated its position within the European financial markets and reached a peak in 2007 when it achieved all-time highs for cash and derivatives turnover, with an increasing number of initial public offerings (IPOs).

Specifically, in the first five months of 2007, the Italian primary market experienced a phase of high activity with 16 new listed companies, of which 12 were IPOs. Moreover, trading in shares reached an average of 307,300 trades per day and E6.5bn (£5.1bn), up 24% and 37% respectively on the corresponding period for the previous year. New records were also set by ETFs (daily average of 5,000 and E109m (£86m)) and securitised derivatives (daily average of 22,000 and E375m (£295m)). Finally, equity derivatives reached all-time highs, with a daily average of 158,400 standard contracts (up 19% on the corresponding period for 2006).

The combined group resulting from the merger will represent Europe's leading equities business, with 48% of the FTS Eurofirst 100 by market capitalisation and the most liquid order book by value and volume traded; in addition, it will be the leading market for electronic trading of ETFs, securitised derivatives and fixed-income market, through its interest in Italian government bond market MTS.

Together, the Milan Stock Exchange and the LSE will be able to leverage their broad and highly compatible range of skills to contribute to the development of their marketplaces, as well as to create a greater platform for additional strong growth of both markets on a European and global scale.

After a quick glance at the objectives achieved so far, the bicentenary celebration of Borsa Italiana provides an opportunity to think over future goals for the Italian financial markets.

Taking due account of the remarkable impact of the Markets in Financial Instruments Directive (MiFID) regulation on the local and international scenario, the next challenges to be faced by the Milan Stock Exchange can be summed up as follows:

• improvement of products and markets transparency;
• restructuring of supervisory systems on an internal and European Union (EU) level; and
• enhancing the role of institutional investors in the Italian market.

Borsa Italiana has made transparency one of its strongest points; helping the 236 companies that listed over the last 10 years to collect more than E50bn (£39.4bn) and to the stock exchange list as a whole over E81bn (£63.8bn) by way of capital increases.

In accordance with the ratio underlying the recent MiFID regulation, as well as the dramatic collapse of international markets over the last few years, however, it is now necessary to further strengthen the disclosure rules currently in force.

The recent scandals that have occurred in the financial markets give a clear sign of this.

In order to avoid market distortions, Borsa Italiana will join forces with competent institutions (i.e. Italian and EU regulators) as well as with market operators in an effort to improve the current transparency regime, as an indispensable step towards ensuring market integrity and investors' protection.

The second aspect to require specific focus is the supervisory system of the financial markets, which should be reconsidered not only locally but also at a European level.

A collective supervision, especially on those big banking and financial groups operating simultaneously on various EU markets, would result in substantial advantages both for the controllers, which would have access to comprehensive information concerning the various components of the groups as well as their interrelation, and for the supervised entities, which would finally be subject to a single set of supervisory rules. Moreover, it would enable a related cost reduction and the avoidance of regulatory arbitraging, as well as the search for the most condescending national supervisory authority.

In this way, it might stand as a concrete example to the other European markets, the memorandum subscribed by CONSOB (the Italian Financial Authority) and the UK Financial Services Authority (FSA), within the framework of the merger between Borsa Italiana and the LSE, which sets forth consultation, co-operation and information exchange processes between the authorities, while maintaining regulatory functions in both jurisdictions.

The final aspect to be taken into account, as well as what is likely to be the main challenge faced in the near future by the Milan Stock Exchange, concerns the current composition of the Italian financial markets and, particularly, the modest role played by institutional investors.

There are just over 300 companies currently listed on Borsa Italiana – an insufficient number for a developed industrial economy such as Italy. Despite the growth that has interested the Italian market over recent years, the national stock exchange appears to be dealing with structural issues relating to the past.

Italian families still seem to be reluctant to invest in the capital markets. Moreover, institutional investors' presence on the Italian market is currently very underdeveloped, especially in comparison with other modern economies. There are only a few pension funds and, in addition, investments funds are now registering notable losses. Collective investment management does not appear to be growing at the same speed as in other European countries.

In order to strengthen the trust of Italian families in the financial markets, it is necessary to set out adequate rules to ensure full disclosure on products and negotiation and hence effective protection for investors.

On the other hand, institutional investors may be attracted to the national markets by way of establishing a rational supervisory system, which operates on an international level by way of homogenous rules in order to ensure the EU markets' integrity is considered as a whole.

It is clear that Borsa Italiana will play a strategic role in the fulfilment of the above objectives, as it has done in the development of the national economy.

The far-seeing decision to seal an alliance with the LSE stands as a first crucial step towards an effective restructuring of the Italian financial markets within the broader vision of a truly integrated European framework.

Luigi Rizzi is a finance and projects partner at DLA Piper in Rome.

ItalyJune2008