ASX Ltd., Australia’s main exchange operator, will hire at least 25 more people this year to expand its clearing business as the contribution of derivatives to profit expands and equity volume falls.
“This is about 25 or 30 of the right people,” ASX Chief Executive Officer Elmer Funke Kupper, 47, said in an interview yesterday. “The main increases we’re seeing are the big initiatives that we’re running, in the post-trade services of clearing and collateral management. We’re seeing more of a shift toward those new investments.”
Exchanges from the U.S. to Europe and Hong Kong are relying more on derivatives as stock-trading profit wanes. Funke Kupper is diversifying ASX’s business amid competition from Chi-X Australia Pty and operators of so-called dark pools, venues that don’t publicly display participants and prices. Average daily value of equity trades on ASX fell by 24.5 percent in the six months through Dec. 31, the bourse said Feb. 21.
The Australian exchange operator, which had an $8.3 billion merger with Singapore Exchange Ltd. vetoed by the government in 2011, this month won its battle to maintain a monopoly in equity clearing and settlement. Clearers act as central counterparties in derivatives contracts to dilute the risk of default.
“Over the last couple of years we’ve learned a lot about the way financial markets operate, the role the exchange plays and the way domestic and international competition is starting to affect things,” he said. “That is all helpful because it makes people better educated and better informed.”
The contribution to ASX’s revenue from cash markets, which include equities trading, dropped to 21 percent in the year to June 30, from 22 percent the previous year and 30 percent the 12 months before that, according to data compiled by Bloomberg.
Cash-market operating revenue in the six months to Dec. 31 was A$54.9 million, 18 percent of total operating revenue, ASX said on Feb. 21. Derivatives accounted for 31 percent of total revenue in the half, the largest business for ASX.
The derivatives market made up 15 percent of Hong Kong Exchanges & Clearing Ltd.’s revenue in 2011, while the cash market proportion fell by 6.8 percent, the most recent data show. Hong Kong Exchanges regained its place as the world’s biggest bourse operator by market value after completing its purchase of the London Metal Exchange in December.
Australian Treasurer Wayne Swan accepted advice from the Council of Financial Regulators to defer for two years any license application from an equities clearing facility seeking to compete in the local market, according to a statement on Feb. 11. LCH.Clearnet Ltd., Europe’s largest clearinghouse, will press ahead with an application to process over-the-counter interest-rate swaps in Australia after being blocked from equities, it said the same day.
“We don’t see an urgency to hit the panic button like others have and go and chase deals,” Funke Kupper said. “The Hong Kong Exchange, the Singapore Exchange, the Japanese exchange once it’s merged, look very much like us. They are vertically integrated exchanges that operate equities derivatives, trading, clearing and settlement. It doesn’t necessarily mean it makes sense for those exchanges to work together.”
ASX shares have risen 15 percent this year, compared with a 8.3 percent gain for the Singapore Exchange. The Hong Kong bourse advanced 4.5 percent and the newly merged Japan Exchange Group Inc. surged almost 80 percent since it began trading in Tokyo on Jan 4. ASX gained 0.5 percent to A$35.96 today.
Lower trading volume is driving exchanges around the world to unite. Bourse companies have been the subject of $50 billion in attempted deals in the past three years, most of them never consummated, according to data compiled by Bloomberg. Swan rejected a takeover bid for ASX in 2011 from Singapore Exchange, citing concern in having the sole provider of Australian clearing and settlement services controlled by an overseas party.
“It’s history now and mergers aren’t back on,” Funke Kupper said. “We are observing what’s happening in the world and observing that Australia is starting to learn a lot about the way financial markets operate domestically and globally. For some businesses, we can’t be an island, but there really is nothing to talk about there.”
Intercontinental Exchange Inc., which agreed in December to acquire NYSE Euronext, will control futures on interest rates that trade on the Liffe exchange in London.
Chicago-based CME Group Inc., the world’s largest futures exchange, has approached Deutsche Boerse AG to consider beginning talks on a merger, according to four people familiar with the situation. Deutsche Boerse’s Eurex division is Europe’s largest derivatives market. The German exchange operator, which had its takeover of NYSE blocked by European regulators last year, has said it’s not in merger talks.
“We can see those players trying to shore up their businesses, very, very significantly focused on derivatives,” Funke Kupper said. “That’s what we’re observing right now. The end effect of all this consolidation is you have few players and you’ve gone through hell to get there.”