• ICE said to consider selling Milan-based stock exchange
  • ESMA ruling could weaken Deutsche Boerse's business model

Xavier Rolet lashed out at Intercontinental Exchange Inc., which is mulling whether to bid for his London Stock Exchange Group Plc, in a round of British newspaper interviews last week. He says it was a response to reports that ICE would dismantle the company he’s been running since 2009.

The chief executive has already agreed to combine the market operator with Deutsche Boerse AG, a deal that values LSE at $13.8 billion and would create a European counterweight to American exchanges and growing giants in Asia. Atlanta-based ICE, which at one time owned Euronext NV, is considering an offer for LSE and may sell off its Milan-based stock market and French clearing unit, according to people familiar with the discussions who declined to be named.

Xavier Rolet
Xavier Rolet
Photographer: Simon Dawson/Bloomberg

ICE’s takeover of Paris-based Euronext was “not a success story” for the stock exchange, according to an interview Rolet did with City A.M. Furthermore, Euronext and its regulators are hoping ICE will win the centuries-old London exchange operator so they can buy back pieces of it, he told the newspaper. ICE CEO Jeff Sprecher’s ownership of Euronext was a “disaster” for the company, he said in an interview with the Telegraph.

Fiduciary Duty

In an April 8 interview with Bloomberg News, Rolet underscored his fiduciary duty to consider an offer from Sprecher if one emerges, but said his earlier comments were meant to reassure shareholders, regulators, customers and employees who may have concerns about future ownership. Rolet said reports that ICE could dismantle the group are destabilizing for some of his businesses. LSE and Deutsche Boerse want to keep their businesses intact.
 
“We run systemic businesses here,” Rolet said. “It’s my duty for the four constituencies I mentioned to give some reassurances and counter these wild speculations. And it’s in that context that I’ve made the comments I’ve made.”

ICE bought NYSE Euronext in November 2013. By the middle of 2014, it had spun off Euronext, which operates stock markets in Paris and Amsterdam. ICE’s primary aim was to acquire a European derivatives business called Liffe. Euronext’s shares have roughly doubled since they listed.

While ICE makes most of its money from derivatives, it would keep the London Stock Exchange equities market, just as it has retained the New York Stock Exchange, according to people familiar with the discussions. A spokeswoman for ICE declined to comment.

Financial Crisis

“We feel that being London-based, it’s important that we continue to have a focus on British and European industry,” Rolet said. “If we don’t, not a lot of other people will, particularly exchanges based very, very far away.”

An important reason for Deutsche Boerse and LSE to combine is the complementary power of their clearinghouses. The firewalls have been embraced by regulators since the 2008 financial crisis, as they are designed to contain the fallout should a derivatives trader default.

Clearing is a lucrative part of both businesses. For now, Deutsche Boerse requires customers to clear their derivatives trades through its Eurex unit. That business model is known in the industry as a vertical silo, and it’s similar to the one used by ICE. Rolet, whose firm has a massive clearinghouse, but doesn’t operate a futures exchange -- at least for the moment -- has campaigned against that model.

Vertical Silo

The vertical silo faces challenges in Europe. New rules known as open access may eventually give Deutsche Boerse’s rivals the chance to clear its derivatives trades, making it vulnerable to greater competition. The rules would also apply to ICE’s European operations.

A recent ruling by the European Securities and Markets Authority could speed up open access and “increases the imperative” for Deutsche Boerse to close the deal with LSE, according to a note by Credit Suisse Group AG analysts.

Open access could also help LSE and Deutsche Boerse reassure regulators that their combined company wouldn’t hamper competition.

“I would encourage observers, commentators and people who have an interest in this proposal to look at the world the way it is today -- not the way it was two or three years ago,” Rolet said. “The industry is changing. Open access wasn’t there two or three years ago.”

Futures Clearing

The combined firm would hold $170 billion in collateral from customers. The companies’ CEOs say they would continue to operate multiple clearinghouses rather than consolidating risk in a single entity. Deutsche Boerse’s Eurex unit is a giant in futures clearing, while LSE is the majority owner of LCH.Clearnet Group Ltd., the world’s biggest clearer for swaps.

“We’ve been accused of seeking to merge our clearinghouses,” Rolet said. “This was never something we thought about. It has never been our project, but it certainly would be, I’m sure, the intent of a silo, a vertical silo, if they acquired somebody like us, would be to merge the clearinghouses. Then I think there’s a systemic case to answer for. Not in the context of open access where our separate clearinghouses are going stay exactly that.”

Tying up so much collateral is expensive for customers. LCH is developing a system that allows traders to offset over-the-counter swap positions with listed interest-rate derivatives at Eurex. The process, known as portfolio margining, would also work between LCH and other companies. A Eurex clearing customer, for example, could essentially move some futures positions to LCH to cancel them out against offsetting swaps.

Portfolio Margining

Rolet points out that portfolio margining should soon be available between LCH and a derivatives platform from Nasdaq Inc. The service would work with Eurex even if the merger doesn’t take place.

Portfolio margining aside, Rolet says his plans with Deutsche Boerse are bigger than that.

“Because we’re in London, which is a global financial center, because our customers also have global needs, we are also in a race to create a global competitor,” he said. “Hence our merger project with Deutsche Boerse. That’s the strategic rationale.”

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