Group Co.
Rolet Says Exchanges Need Scale
Traders Magazine Online News, March 10, 2017
Xavier Rolet, chief executive of the London Stock Exchange Group, said the exchange sector still requires scale despite the possibility of the European Commission blocking its planned merger with Deutsche Börse.
The UK and German exchange groups announced plans for a£29bn ($35bn) “merger of equals" last year before the UK vote to leave the European Union. Although shareholders have voted to agree the merger, it has been under review by regulators, politicians and the European Commission competition authority.
At the beginning of this week the LSE said the deal could collapse as the European Commission has ordered the sale of MTS, the UK exchange group’s Italian bond trading platform. The LSE said in a statement on 26 February: “Taking all relevant factors into account, and acting in the best interests of shareholders, the LSE Board today concluded that it could not commit to the divestment of MTS.”
The Commission is due to announce its decision on or before 3 April 2017. The LSE said this morning in its preliminary results statement for 2016 that the group “continues to work hard on its proposed merger with Deutsche Börse.” However the group is also offering shareholders a 20% rise in the full-year dividend, indicating that the deal is likely to collapse.
Rolet said on a conference call today that he could not prejudge the outcome of the Commission’s review but the trend for mergers will continue as the exchange industry lacks scale which is demanded by issuers, banks and investors.
‘Exchanges are looked at as local operators where politicians like to hang their flag, similar to other industries such as airlines,” Rolet added. “We pursued an acquisition with global reach, but which had a local set-up, and the need for further consolidation will not go away.”
Rolet continued that the LSE would continue to look for smart strategical acquisitions, which are priced at a discount and likely to be accretive. He identified pre-trade risk management, post-trade and capital markets as potential areas where the group could make acquisitions.
In capital markets fintech and crowdfunding could give additional access to capital to smaller firms, outside the LSE’s existing institutional client base. “We will not buy hockey stick businesses which are based on a fad and make losses while promising revenues in two or three years,” added Rolet.
In addition, Rolet highlighted “tremendous’ opportunities for organic growth, especially in LCH, the clearing business. He argued that the new MiFID II regulations come into force across the European Union at the beginning of next year will mandate open access and boost competition. “We will take full advantage of MiFID II and cannot wait,” he added.
Rolet predicted that MiFID II will transform futures trading as open access will require fees to be unbundled.
Last year LSE introduced the CurveGlobal Interest Rate futures platform in partnership with a group of banks and CBOE and 425,000 contracts were traded between the end of September 2016 and January 2017. In addition the LSE also launched LCH Spider last year to allow portfolio margining between over-the-counter and listed derivatives and allow clients to use capital more efficiently.
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