Xavier Rolet, the chief executive officer of the London Stock Exchange (LSE), is tackling fierce competition in Europe. In an attempt to turn around the region’s oldest independent bourse, he has put in place a new trading system, changed fees and is entering new markets. Recently, LSE tied up with the National Stock Exchange. In an interview with Palak Shah, he talks about the dynamics of this partnership and LSE’s India plans. Edited excerpts:
What made you tie up with NSE? How will the alliance work to the benefit of both?
NSE has established a leadership position in the Indian market. The alliance brings options contracts of the Nifty 50 Index, while we bring the FTSE indices to India. LSE owns 50 per cent of the FTSE Index business with Pearson, the owner of Financial Times. This is a good match in terms of bringing India’s high-growth index property to Europe.
LSE has leadership in small and mid-sized enterprise funding, clearly an area of interest to NSE. Considering the growth potential of the SME (small and medium enterprise) sector, the alliance will particularly benefit NSE. I cannot give a time-frame for listing of the Nifty Index in Europe, but it should happen relatively soon. While only options will be listed initially, there is an opportunity to do more.
The FTSE group has also tied up with MCX-SX, another exchange in India. Is LSE’s tie-up with NSE exclusive? There are talks that Pearson was looking to part ways with LSE.
As of now, LSE and NSE have just announced details of cooperation in some areas. We have not said anything about exclusivity. It is an opportunity for both to establish a partnership than can grow over time.
FTSE’s relation with MCX is not at all exclusive. By definition, FTSE, unlike S&P and Euro STOXX, is a non-exclusive index provider. So, the two (LSE’s tie-up with NSE and FTSE’s with MCX) can be carried out together. On your second question, we never comment on corporate actions.
How do you value the domestic stock exchanges in India? How is the global exchange industry evolving?
Some recent transactions in the Indian exchange space show that international interest is high. Clearly, the valuations reflect a premium for expected future growth. Some likely regulatory changes in the US and Europe will put the $615-trillion over-the-counter derivatives market on to exchanges. A number of banks already understand the opportunity for them to relieve their balance sheets through central clearing of a number of standardised OTC (over-the-counter) derivatives, and perhaps even migrate some of the related trading activity to exchanges. The LSEG still has progress to make in that area, and as I’ve said before, we are reviewing it constantly and some announcements will be made in the due course.
Our group’s historical weaknesses lie in the UK post-trade and clearing area. Our Italian post-trade assets are extremely efficient and competitive, but we need to address our group’s historical weakness in the UK post-trade and clearing market if we want to compete more effectively with other exchanges. In 2001 we also missed the acquisition of LiFFE: This will take some time to correct, as we work hard to compete with the European incumbents.
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The global climate of consolidation in the exchange space is likely to resume once the ongoing financial stress is over. LSE expects to play a crucial role in this and India will be a key country we will be looking to partner with.
Are you looking to buy stake in any Indian exchange?
It is a legitimate question. But as a matter of policy, we will not comment. The current norm of not allowing investors to pick up more than five per cent in Indian stock exchanges clearly hinders international investment in this space. You will have to look at the fact that the financial services market in India is growing swiftly. I would expect these restrictions to be relaxed over time. But at the moment, we do not see it as a problem to working in partnership with Indian financial services and infrastructure companies
We would be chiefly focused on our own experience in raising finance for SMEs, as the sector is pretty good for the growth of India’s economy. We would look for further collaboration with an Indian exchange in this space.
There is a need for external import of capital to turbo-charge the engine of growth and increase the rate of job creation, where SMEs will play a big role.
LSE is facing terrible competition in Europe and derivatives remain a big challenge. What is the strategy?
LSE has three major areas of change — in technology, cost and stabilising of market share. We have managed to stabilise and increase our equity market share from around 51 per cent to 62 per cent. We recently finalised the integration of Borsa Italiana.
Millennium IT is the new technology provider across our fixed income, cash equities and derivatives platforms. We have struck a partnership with 12 of our largest clients and taken over the management of Turquoise, a pan-European share trading platform. We are not only competing in Italy and the UK but at a pan-Europen level, which sets us apart from other european exchanges.
Further, in partnership with TMX Group, the Canadian exchange operator, we are in the process of migrating our derivatives technology platform, SOLA. Against this, TMX has bought a 20 per cent stake in our European derivatives exchange, called EDX. Competing against incumbent platforms in the derivatives area is a challenge, but we will be announcing a number of initiatives over the coming months. The extension of our derivatives business and review of post-trade activities, which generate 19 per cent of our overall revenue, is on.
Apart from this, we already operate the largest pan-European government bond platform, two corporate retail bond platforms, two commodity markets, the largest pan-European ETF platform, bringing in excess of 30,000 products to the European capital markets. There is a lot of product expertise within LSE Group that people are not aware of. For us, the challenge is to grow them to a critical mass at a pan-European level. We still have some catching up to do in a number of areas.
There is fierce competition for LSE in UK itself, as NYSE Euronext is now providing London listing.
NYSE can’t expect to compete for international listings in London without a successful UK equity trading platform. Their own US market is less attractive to issuers due to stringent (and ineffective, as we've seen in 2008) regulations like Sarbanes-Oxley. They are also under pressure from the French government to bring listings to Paris, a much smaller and less liquid financial centre. The Deutsche Boerse has a similar issue. London clearly remains the most attractive European platform for listings.