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27 February 2011
London Stock Exchange chief Xavier Rolet sees a bright future for the bourse
Telegraph.co.uk, 18:59, Saturday 26 February 2011
Xavier Rolet, London Stock Exchange (LSE: LSE.L - news) chief executive, has just been through an astonishing two weeks for his market.
'It's a real test of endurance," Mr Rolet says. "You're out there alone and don't know what's going to hit you. You have to be incredibly focused and have a real desire to win."
Frenchman Rolet is waxing lyrical about the Paris-Dakar Rally which his job doesn't allow him to compete in anymore but he may as well be talking about an astonishing two weeks for his market.
First (FSTC.OB - news) came the merger with Toronto Stock Exchange owner TMX Group (X.TO - news) , thrashed out over months of negotiations but then trumped the same day by a much bigger combination of rivals Deutsche Borse and NYSE Euronext (NYX.NX - news) .
Mr Rolet pressed on, trumpeting the superior technology of the LSE's new MillenniumIT trading platform as the weapon to torpedo the combined might of the Paris, Brussels, Amsterdam, Frankfurt and New York (Xetra: A0DKRK - news) markets.
But then something else unexpectedly happened. On Friday, MillenniumIT's 10th day of action after its Valentine's Day introduction as London's new core UK equities trading platform, a glitch led to trading being shut down for four hours.
It was London's biggest outage for 15 months and the LSE's second in four days, after the shutdown of its Milan exchange virtually all day on Tuesday by a computer fault.
"Obviously we take this sort of thing very seriously, and throughout we tried to keep the market informed and updated," sighs Rolet, 51.
The problem is that since the momentous day of merger announcements, the LSE had flagged its MillenniumIT trading platform developed by a Sri Lankan firm it bought for £18m in October 2009 as the competitive advantage that would enable it to take on the might of a merged Deutsche-NYSE Euronext.
"This has given us not only the state-of-the-art expertise we needed but also a very low cost base, which is very, very critical," said Mr Rolet four days before the outage.
"Our competitors are spending money hand over fist to build these enormous systems, and we do this for a fraction of the cost."
Friday's crisis might have made Mr Rolet regret this claim as well as his comment that the Millennium (TIBR3.SA - news) deal provided a platform for fixed income, clearing, settlement and derivatives for £2m less than the LSE used to pay to a software consultant every year to support just its UK cash trading platform.
That won't go down well in Canada, where newspapers are warning that this is the platform Toronto would get if the merger goes through.
And there are potential teething problems to overcome, with seven other platforms that the LSE wants to migrate to the new system during the next 12-15 months.
It is probably best to focus on Mr Rolet's claim that 210-year-old LSE would have gone bust during the credit crunch had some highly-leveraged hostile bids for it succeeded during the eight-year term of his predecessor, Dame Clara Furse.
The LSE is not the dominant force it once was, now hosting less than 60pc of the trades in shares in constituents of London's flagship FTSE 100 (VFTSE.NX - news) index.
Furthermore, Mr Rolet argues that the bids from Nasdaq (NASDAQ: news) , Deutsche Borse, Euronext (Xetra: A0KEPS - news) and Australia's Macquarie Bank repelled by Dame Clara stemmed from the LSE missing the 1990s development of the post-trade industry in clearing and settlement, and being defeated by Euronext in 2001 in the battle for derivatives market Liffe.
"You don't attract interest unless there's a weakness somewhere," he says. "If you're offering a great business model and great returns to your shareholders and your clients are happy, naturally people will leave you alone. However, the LSE was left effectively as a cash equity trading engine and an IPO platform and that meant its trading model was imbalanced. It was effectively in a perfect situation to be acquired.
"My predecessor did a good job because a number of these hostile advances were highly leveraged, and we know what leverage did to many financial companies in the credit crunch. They went bust. Had some of these highly-leveraged transactions gone through and remember they had been waved through by the regulator it's doubtful the LSE would still be around today. The Nasdaq and Macquarie bids were eight times leveraged. You just don't leverage infrastructure. It doesn't make any sense. Allowing leveraged takeovers of infrastructure companies is inherently dangerous."
Conversely, Rolet argues that a benefit of the TMX merger is that the LSE and Toronto have low leverage, and the combined company's ratio of debt to earnings before interest, taxation, depreciation and amortisation would be about one.
In contrast, the New York Stock Exchange and Deutsche Borse both have ratios in excess of two times, while Nasdaq has a ratio of three times and has been put on negative watch by some credit ratings agencies.
"What are the problems today?" Mr Rolet cries. "What are the policies that lawmakers and political decision-makers are trying to make? Clearing over-the-counter derivatives in a central, efficient, resilient post-trade entity.
"You can't do that if your balance sheet is excessively leveraged. NYSE and Nasdaq are very highly leveraged so they're not going to be in a good position to offer what lawmakers want.
"We would be in a very good position to do so. So this deal is really one step to creating a global competitor, a transatlantic competitor with a very strong balance sheet and great expertise in the growth of tomorrow."
Mr Rolet expects growth to come from two main areas. At home, it will be powered by small and mid-sized firms, a sector where he says the LSE and TMX are leaders.
Overseas, he sees enormous opportunity for the combined LSE/TMX to take advantage of the commodities and energy infrastructure supercycle in emerging markets during the next 30 to 40 years to become a new leader in providing exchanges with technology services.
"Until now, this has been a duopoly between Nasdaq and the NYSE, but we are starting to enter that market," he says.
"Bringing TMX's technology and our technology together in clearing, fixed income, equities and derivatives, we can become the new leader."
Mr Rolet says his first 21 months was spent re-engineering the LSE to bring down costs, modernise technology and integrate Dame Clara's merger with the Milan stock exchange.
Now he says the LSE's trading platforms are the world's fastest, and among the lowest cost and most efficient. The merger will also help catapult the LSE from sixth place in the league table of company listings to global leader with 6,697, ahead of Bombay Stock Exchange's 5.407.
Again, Rolet is keen to differentiate his merger from that of his rivals. "Deutsche and NYSE Euronext are two companies that have made huge investments and spent very, very large amounts of money," he says.
"I think NYSE spent $1bn on two data centres. Deutsche Borse has made similar very substantial investments, so their merger now is really about trying to reduce costs.
"Our transaction is completely different. It's really about creating a new global competitor, which will be the first global platform for company IPOs and the raising of capital, with a clear leadership in commodities, energy, mining and extractive industries, and other areas such as SME financing. Together we'd have undisputed leadership in these areas."
Predictably, Mr Rolet is taking advantage of the unexpected proposed union between Deutsche-NYSE Euronext union to try to lobby regulators to ease competitive pressures on the long-awaited debut of the LSE's Turquoise derivatives market in London in the second quarter of this year.
Having missed out on Liffe, LSE is a mere tiddler in this market, but Mr Rolet intends it to have a loud voice in calling for regulatory conditions to be attached to any approval of the Deutsche-NYSE Euronext combination.
"It will create a huge monopoly in Europe (news) for derivatives," he said. "They will have 93pc of the interest rate derivative market and 90pc of the equity derivative market at a pan-European level on a single platform.
"It's a real issue when a single operator controls 90pc or more of a market. The Treasury keeps highlighting how important it is to have competition in cash equities markets.
"We're hoping the same principle will be applied to the derivatives market to give us an opportunity to compete. We would ask the competition authorities to think through ways that competition could be increased. We think it's a fair request."
As an example, he cites the €350m (£298m) annual profit that he says Deutsche Borse makes through the trading and clearing of the STOXX50 index, the central index for pan-European equities, by its subsidiary Eurex.
"It's a monopoly," he declares. "They own the index provider and they're licensing this index exclusively, so if you want to trade the STOXX you have to trade, clear and settle.
"Deutsche Borse operates the STOXX monopoly and refuses to license it to people like us who would like to compete.
"As a result, they make a lot of money. €350m is an enormous amount of money to make on a single contract. It's about half the total revenues of the London Stock Exchange." In contrast, he says, the fees collected by multilateral trading facilities and exchanges that operate in the 27 European Union cash equities markets, where competition has been introduced, amount to about €75m a year. "We would like the European Commission, if they are going to wave through such a monopoly, to force the incumbents to at least give us the opportunity to list the STOXX contract," says Mr Rolet.
He forecasts that global consolidation will shrink the world of exchanges to about five mega-exchanges. "Four, five or six global exchange groups will emerge. Two will be American; we think two will be Europeans and there is probably room for two or three to be Asians. With our Canadian friends, we want to be one of them."
Photo: FreeFoto.com
Author: Andrew Cave
