Board of Directors’ report

The VPS Group can look back on a successful year and a sound profit performance. The market has seen stock exchange advances and high activity levels among our customers, generating growth in all business areas. Services and products have been delivered with high quality and reliability. Substantial sums have been invested in new products which have been well received by our customers, boosting sales of new services.

A new company, VPS Clearing ASA, was established within the group on 1 September 2006. This company took over the financial clearing business in Norway from NOS Clearing ASA, getting off to a successful start. This has strengthened the VPS Group’s position in the area of securities settlement in Norway, enabling the Group to further develop efficient securities handling in close cooperation with its customers and partners. The VPS Group is located in Oslo and has no branches.

The Group reported a post-tax profit for the year of NOK 216.0 million – the best in the company’s history. Operating income rose by NOK 96.5 million, or 28.6 per cent. Costs were kept well under control, rising from NOK 188.6 million in 2005 to NOK 216.7 million in 2006. The increase was due to staff increases, to pay rises effective as from 1 January 2006 and to the fact that pension costs in 2005 were NOK 8 million lower owing to a reduced commitment related to a plan change in the defined benefit pension scheme. Other administration expenses increased from NOK 48.4 to NOK 67.2 million, mainly due to greater use of external consultants in development projects, which have been capitalised. Security and production expenses rose by NOK 7.0 million as a result of a one-time outlay on upgrading hardware capacity to cope with the substantial volume increases in the market, and higher software licence fees.

Development projects were capitalised at NOK 37.9 million. Book equity at the end of 2006 came to NOK 453.4 million.

VPS ASA
Within the VPS Group, VPS ASA operates as a Norwegian public limited company licensed to register rights to financial instruments with the legal effects entailed by the Securities Register Act. VPS ASA develops and markets products and services for banks, investment firms, management companies and other financial institutions.

Activity in the securities market was high throughout 2006. VPS handled a total of 24.2 million transactions related to trades in securities, an increase of 51 per cent over the 2005 figure. A further 4.3 million purchases and sales of mutual fund units were handled, an increase of 30 per cent on 2005. The number of customer relationships increased by 12 per cent, mainly due to growth in securities funds. At year-end more than 2 million holdings in financial instruments were registered in VPS across a total of 1.43 million VPS accounts. The number of mutual funds registered in VPS rose by 192 in 2006, bringing the total to 843 at year-end. New company registrations came to 218, net, bringing total VPS-registered private and public limited companies to 1,283 at year-end, 101 more than one year previously. VPS systems’ production and accessibility were at a stable high level in 2006, as previously. The production system’s uptime averaged 99.9 per cent, while the internet system’s uptime was 99.5 per cent. The settlement ratio – the number of trades settled on the agreed date – rose to 97.6 per cent in 2006, up from 97.1 per cent the previous year.

VPS scrutinised significant risks and the measures in place to safeguard against
these risks. No significant risks posing a threat to VPS’ operations were revealed.
Tests conducted of continuity and contingency plans successfully restored all
critical systems at a secondary site.

VPS is certified under NS-EN ISO 9001:2000. This standard puts emphasis on the internal processes needed to achieve corporate goals. Det norske Veritas has conducted half-yearly audits without bringing to light significant flaws.

VPS assessed the efficiency of its IT operations and obtained bids from outsourcing providers in this area. The conclusion drawn was that VPS’ operations are cost-effective, and that no gains would be made by purchasing this type of IT service from an external provider. VPS’ IT solutions will be further developed within a new architecture to ensure continued maximum operating efficiency in the future.

VPS conducts regular surveys to gauge clients’ perceptions of VPS’s products and services. Clients report a high level of satisfaction.

In cooperation with account operators, VPS initiated in 2006 a development project to renew services to this customer group. The result was VPS Investor Services, a customer service system that will provide our customers with a new, expanded functionality based on modern and more user-friendly technology known as Service Oriented Architecture (SOA). VPS Investor Services was launched at the end of 2006, with minimal disruption to day-to-day operations. The VPS infrastructure now has a new customer and account structure which will be followed up in 2007 with new services developed in cooperation with our customers.

In the mutual funds area two well-established management companies opted to replace their systems with VPS’ unit holder system. At the end of 2006 16 out of 19 Norwegian management companies were registered in VPS.

Use of VPS’ services to investors continues to increase, with the result that more and more investors are benefiting from self-service solutions. In 2006 more than 140,000 mutual fund trades were registered via this service. At a year-end almost 500,000 investors had access to these services.

At year-end VPS had 91 settlement participants of which 30 were settlement agents and 61 were brokers. Eight new settlement participants joined in 2006. Of the 61 brokers participating in the settlement process, 29 are remote members. Of these, five are direct participants while the remaining 24 are represented by an agent.

The Act on Mandatory Occupational Pensions (MOP) went into force in 2006. All employers are now required to arrange occupational pensions for their employees. VPS adapted its systems accordingly, and has recorded a steadily rising influx of entrants to contributory schemes. The number of MOP agreements registered via the VPS rose over the year to 6,000, and encompassed about 33,000 employees at year-end.

High market activity was seen in 2006, particularly in the settlement area, with a strong increase in the number of trade transactions. However, a high level of automation in VPS’ systems enabled customers to handle these high volumes at no additional cost. In 2006 VPS introduced improved matching criteria for trades. In the international arena BIC codes have been introduced for buyer and seller identification. VPS has also introduced BIC codes together with trade date and the counterparty’s account number as possible matching criteria.

VPS assesses current prices on services, comparing them with prices charged by other CSDs. Price comparisons made in 2006 show large differences in price structure between the various CSDs, and that all in all VPS’ price level is on the same level as in the other Nordic countries. It has been decided to lower the prices on settlement services by about 7 per cent with effect from 1 April 2007. Changes will concurrently be made in the discount structure and fixed fees.

VPS launches new services and product improvements three times a year. This affords customers substantial predictability since they know when the next VPS version is due. At the same time VPS has a better opportunity to plan and conduct sales and marketing.

Where the bond market is concerned, VPS has decided to establish new solutions and systems for fixed income securities.

Manamind AS
Manamind is one of the Nordic region’s leading providers of solutions for web-based securities trading and distribution of market data in real time. The company is also a substantial provider of information on Norwegian securities.

In the course of the year the company more than doubled both its turnover
and its customer base through increased sales of its share trading system, stock information portal, Manamind IR and Manamind Arena (TOP30).

VPS Clearing ASA
VPS Clearing ASA is a Norwegian limited liability company licensed to operate as a clearing house in relation to derivatives and commitments concerning loans of financial instruments. The company joined the VPS Group on 1 September 2006. Clearing business has shown good growth, with high activity in the securities borrowing and lending scheme and in clearing of OTC derivative products. VPS Clearing launched its new clearing solution, SECUR, in November. A financial guarantee from Radian Asset Assurance Inc. strengthened the company’s clearing capital by USD 60 million, bringing total clearing capital to about NOK 490 million at end-2006.

Administration
At year-end the Group had 148 employees, equivalent to 128 full-time positions. Growth derived partly from capacity increases within existing areas and partly from the establishment of VPS Clearing with a ten-strong staff. Employee surveys show that VPS has a good working environment. A competence building programme has been carried through to duplicate expertise in areas critical to VPS’s operations, and spearhead competence has been strengthened in some development areas.

The company has a contract with an occupational health service. In 2006 the sickness absence rate was 4.3 per cent, of which long-term sick leave (more than three consecutive weeks) accounted for 1.9 per cent. The company does not engage in activities causing noise or emissions that impact on the external environment. No injuries or accidents were recorded at VPS in 2006.

Remuneration to the President and CEO, senior employees, Board members, the Supervisory Committee and auditor is dealt with in Note 3 to the Accounts.

The Board of Directors is delighted that the company has achieved its objectives in all key areas and commends the employees for carrying through demanding new development projects and for their reliable handling of current operations in a year of record-high volumes.

Gender equality
Fifty-one (i.e. 34.5 per cent) of the Group’s 148 employees are female. The Group has 21 managers: 5 females and 16 males. The average annual salary for all employees, excluding the management team, is NOK 497,202. Females earn on average 15 per cent less than males. This is partly due to age distribution: male employees predominate among the over-50s, and virtually all have been with company since its early years.

The female proportion, standing at 35-40 per cent over time, is considered creditable in VPS’s line of business. The Group will continue its effort to appoint more female staff, and to increase the number of female managers.

Normal working time is 40 hours per week. Overtime is fairly evenly
distributed between female and male employees. The great majority of
employees have a home computer which can be hooked up to VPS, and home working is equally prevalent among male and female employees.

Collaboration and alliances
VPS ASA owns 50 per cent of FinansNett Norge AS (FNN). FNN offers investment firms, banks, stock exchanges and others a forward-looking, secure network for all types of data communication.

VPS reviews on a constant basis the possibility for extended cooperation with other enterprises with a view to cost synergies and greater capacity for services and product development.

International arena
A wide-ranging process is under way within the EU aimed at harmonising the European securities market. Both VPS ASA and VPS Clearing signed a Code of Conduct designed to foster competition by promoting price transparency and freedom of choice for investors in connection with cross-border trading and settlement. VPS’s prices were published in December 2006.

VPS is a member of the European Central Securities Depositories
Association (ECSDA). Through its active participation in the work of this association VPS plays a role in developing standards in the European securities market.

VPS allocates securities numbers (ISIN) and is therefore a member of the Association of National Numbering Agencies (ANNA). VPS is also a member of SWIFT NNG (Norwegian National Member Group) and of The European Association of Central Counterparty Clearing Houses (EACH).

Risks and uncertainties
The Board of Directors considers that there are no significant risks posing a threat to VPS’s operations. It is important to further develop services in close collaboration with our customers to reduce the risk of interruptions to business. In 2006 VPS ASA’s technological platform underwent substantial renewal and new account and investor services were launched. A development programme is planned for issuers of mutual fund products to ensure that services remain competitive in the future.

According to stress tests conducted at VPS Clearing in the period mid-December to mid-January, the company’s exposure in a worst case scenario is about NOK 40 million. This figure includes actual overnight risk. The company’s total clearing capital at end-2006 made up 8.24 per cent of total capital when the guarantee furnished by Radian is included.

The design of the regime for cross-border settlements in Europe in the longer term is uncertain. A number of initiatives from the EU authorities are intended to boost competition, and central banks are keen to establish Europe-wide solutions.

Proposal of merger with Oslo Børs
On 18 March 2007 the boards of directors of VPS Holding ASA and Oslo Børs Holding ASA agreed to propose that the two companies be merged. The boards believe that a merger of the two companies will allow more efficient and co-ordinated use of their overall resources and expertise, and so strengthen work on developing the entire value chain of the Norwegian securities market.

Outlook for the future
The Board of Directors views all companies in the VPS Group as a going concern. The Board anticipates continued high activity levels. However, all experience shows that securities markets ebb and flow. Activity ahead in terms of transaction volumes is therefore uncertain.

We expect some increase in revenues and expenses to result from investment in new products.

Application of the profit for the year
The VPS Group achieved a post-tax profit of NOK 216.0 million in 2006. After transfers from VPS ASA and Manamind AS, the profit for the year posted by VPS Holding ASA came to NOK 210.6 million. The Board of Directors proposes that the profit for the year be distributed as follows: