LSE's Derivatives Market to Launch Despite Talks With Rival

Updated on
  • CurveGlobal market is on track to start later this year
  • LSE has done substantial technology work on Curve, Rolet says

London Stock Exchange Group Plc will go ahead as planned with the launch of its new derivatives market, even though the venue will compete with a market run by potential merger partner Deutsche Boerse AG.

The project, called CurveGlobal Ltd., is on track to start trading later this year, according to LSEG Chief Executive Officer Xavier Rolet. The venture is a consortium with banks and the Chicago Board Options Exchange, and is explicitly designed to take on the giants of European interest-rate futures trading.

The operator of the region’s other dominant derivatives market, Intercontinental Exchange Inc., may also pursue the London Stock Exchange.

“This project will continue unaffected by any potential merger plans,” Rolet said on Friday on a conference call with reporters. “We’re focusing on obviously beefing up the resources, continued investment. A lot of the technology work has been done.”

LSE confirmed last week that it’s holding merger talks with Deutsche Boerse, Europe’s biggest derivatives exchange. Bloomberg reported on Monday that ICE is considering its own bid for the London firm, pushing LSE’s shares to a record.

The rationale behind CurveGlobal is similar to the reasoning behind the acquisition talks. Deutsche Boerse, for example, has a sizable futures-clearing business, while LSE is the majority owner of LCH.Clearnet, the world’s biggest clearer of swaps. Bringing the clearinghouses together would allow customers to reduce the overall collateral they hold at the two institutions, saving them money. The process is called cross-margining. CurveGlobal was set up to achieve the same outcome.

If LSE fails to complete a deal with a merger partner, it would still need CurveGlobal to diversify into derivatives trading and compete with Deutsche Boerse and ICE.

Observers hoping for merger details during Friday’s earnings call were mostly left wanting. Rolet declined to comment on many questions, citing regulatory restrictions on what he can say during merger talks.

Demand for more information is intensifying amid signs that a bidding war is looming. Details about a potential ICE bid have begun to emerge, signaling the company’s seriousness about pursuing LSE, which started out in a London coffee house in 1698.

ICE would explore selling LSE’s Italian business, Borsa Italiana, if it succeeds with a takeover, according to people familiar with the matter. The Atlanta-based company would also consider spinning off LSE’s French clearinghouse, one of the people said.

While Rolet has been clear over the years that consolidation between what he refers to as financial infrastructure companies is inevitable, he also sees space for “nationally positioned exchanges.” He didn’t comment specifically on Borsa Italiana, but his remarks on Friday didn’t rule out the potential for it to play a useful role as a stand-alone company.

“We believe there will continue to be room for more locally positioned, perhaps nationally positioned exchanges, who will also look at financing the real economy and cater to their local environment,” Rolet said.

LSE’s shares slipped 1.1 percent to 2,862 pence at 10:51 a.m. in London, falling from the record price they set yesterday.

— With assistance by Aaron Kirchfeld

(Updates in tenth paragraph with potential Borsa Italiana spinoff.)
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