Xavier Rolet: London exchange chief drives the rough road

The chief executive of the London Stock Exchange and keen rally driver knows he is taking a risk by challenging the equity derivatives market. Margareta Pagano meets Xavier Rolet
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The Independent Online

Xavier Rolet, the chief executive of the London Stock Exchange, knows how to handle danger; the Frenchman has raced in four Paris-to-Dakar rallies, two of them successfully, the others with less luck. His car engine blew up on one, while on another he was ambushed by Mauritanian terrorists.

Rolet will be missing from next year's rally – now in South America to avoid the terrorists – partly because the insurance to cover him costs so much, but also because he's busy steering the exchange down its own fast track. And, after what seemed some dithering, Rolet finally announced last month that he is hurtling head on against the Euronext NYSE Liffe and Deutsche Börse with plans to launch London's own equity derivatives market.

But Rolet's entry into this profitable, high-margin, pan-European sector, which produces €1.2bn (£1bn) revenue a year, has been greeted with derision from the Franco-American and German exchanges and scepticism from some industry watchers for being too little too late.

Rolet notes the concerns but dismisses the fears. "Liffe and Deutsche Börse's Eurex exchanges run a duopoly, and in all duopolies there is room for a third competitor. I don't pretend it's going to be easy to compete, and it will take time. But we have innovations, new products and the new Sola technology that will allow us to compete effectively. We see weaknesses in many of their products and are working on some new ones which we think customers will like," he says.

If all goes to plan, the new trading platform, Turquoise, now run with some of its biggest bank customers, will roll out a pan-European offering early in the new year, starting with equity option products and using a combination of LCH Clearnet and Italy's CC&G for clearing.

Rolet is so optimistic that over time – he's giving it five years – he hopes to get 25 per cent of all the London exchange's revenues from derivatives compared with only 6 per cent today. There are other changes afoot that make this a good time for him to be breaking the duopoly. First, the EU is likely to investigate competition issues which have protected the two big players. Second, more than three-quarters of all equity options are currently traded over the counter. With regulators pushing for more transparency, more of these products will be brought on exchange; he wants to capture them first.

As exchange watchers will know, London's dominance as Europe's leading market was damaged by two massive strategic mistakes by previous management. In the 1990s, the LSE failed to get ahead in post-trade functions when its Talisman and the Taurus settlement systems collapsed. And then, in 2000, it lost the takeover battle for Liffe, the highly successful futures exchange, to Euronext, now itself part of NYSE group.

Losing Liffe was the most unforgivable error by the LSE and set the exchange back a decade. But Rolet is too smart to be drawn on the past, adding instead: "Our real challenge is to make up for these momentous events. There isn't another Liffe out there, so we must create one."

One area he has grown from scratch since taking over 18 months ago is the new corporate bond market; it now has 150 listed company and government bonds and its volumes in October were six times those of August. Retail investors in Italy – London and the Borsa Italiana are merged – are among the most active, with an appetite for RBS and Barclays bonds, while it's proving to be a fertile market for middle-sized companies raising new capital for expansion.

And it's the small- to medium-size enterprises that Rolet is most keen to nurture. "I'm a passionate defender of SMEs and the role they have to play in the economy. There are 4.8 million SMEs in the UK and it is these companies that will create the new jobs of the future; not the blue chips in the FTSE 100. If every small company in the UK creates only one new job, then we'll have 48,000 new jobs – but the mechanisms have to be right."

But they are not good enough for Rolet. "We still have a culture that favours debt rather than equity, which is extraordinary considering the crash. We need to change the balance; debt is tax deductible for most companies, and private equity firms, but investing in equity is taxed four times – corporation tax, capital gains tax, stamp duty on share transactions and then personal income tax."

Like his predecessors, he is lobbying the Government to kill or at least reduce stamp duty. Dropping it, he believes, will encouraging trading and more than outweigh the losses to the Treasury. Even if it was done only for SMEs, he argues, the loss would be worth every penny. He has four other fiscal incentives he's trying to persuade the Government to adopt, including relaxing tax for venture capital trusts investing in small start-ups, a more favourable CGT regime for investing in quoted companies, letting VCTs invest in the secondary market and allowing ISA investment in quoted companies as well as giving big companies R&D tax breaks so they could invest in new businesses and give a boost to private sector growth.

"Companies in the US have about $2trn [£1.3trn] cash on the balance sheet which is not being used; they should be encouraged to invest in start-ups in their sector by giving them tax breaks. Microsoft could be investing in other hi-tech companies, for example. In Europe, there's ¤1.5bn sitting around doing nothing – why don't we give them tax breaks so they can fund the next generation of entrepreneurs?"

The politicians he talks to agree that adjusting the system away from being so debt-reliant towards securitisation is a no-brainer. So far, though, they have not been brave enough to move because all these measures would cost money. But Rolet asks: "Is there ever a bad time to do a good thing? It's not capitalism that people dislike so much, but the booms and bust that go with it. And the booms have nearly always been caused by a build-up of debt, of leverage in the system. Only the internet bubble of 2000 was rather different – it was an equity valuation boom so collapsed without too much pain. But the past decade was one of debt addiction; everyone was on steroids; the regulators, the politicians and the bankers and traders all got carried away. This must be changed. If the system were skewed back towards equity – you could say, proper capitalism – then maybe we could have a more balanced economy and society." That's why retail investors should be encouraged back into the market as they are in Italy, where a third of shares are owned by small investors, which in itself brings stability.

For now, the outlook for new listings on the London exchange looks good; there's a big pipeline of companies hungry for capital as they restructure their balance sheets. "It's Catch-22; there's a vicious circle to undo before we get to the virtuous circle. Equity markets have been volatile but as they calm down you will see that they are undervalued against bonds." But on the broader economic outlook he's more pessimistic, predicting that France will follow Spain and Portugal as a target for the markets. "France is the next one to go; its debt, when you take into account all the off balance sheet debt, is enormous but it can't be hidden. The markets will get there. I see tough times ahead and the death of the European social model. But, ultimately, the Germans will take charge and impose fiscal union and these countries will be forced to take serious action. So the euro will emerge stronger."

Rolet's rise to one of the most gilded jobs in British finance is extraordinary. A few hours chatting to him in his office overlooking Paternoster Square reveals why the LSE elder's chose him: he's erudite yet driven.

His early life was spent in Algeria, where his parents were in the French military, but he grew up in one of the poorest suburbs of Paris, Sarcelles, an area which is today 99.9 per cent Muslim, and where the people are deprived of the basics, especially education. It was education that gave him his escape; after winning a Rotary Foundation Scholarship, he studied for his MBA at Columbia University. Then it was to the sharp-end at the arbitrage desk of Goldman Sachs, staying for nearly a decade and then moving to its London office.

Unusually for a Frenchman, his three children went to British schools. Two of them are now at university here, one daughter reading classics at Cambridge. His wife, Nicole, a half-American, half-Italian former banker, runs the family vineyard, Chêne Bleu, at La Verrière in Provence. She works as "hard as I do" on producing the 60,000 bottles of award-winning wine they make each year; some bottles go for as much as £65 and sell at top-notch places like Nobu and Sketch.

As well as rally driving, Rolet is a beekeeper, a fanatical skier, scuba-diver and fly-fisherman. He reads avidly on history and architecture, and knows more than he should about the intelligence and defence services and space technology, having co-written the Galileo report on satellite navigation for a former French prime minister.

How does he find the time to work? He laughs: "I make the time for everything. You just do." There's no doubt he's got his work cut out to get the exchange back leading the pack; it's down to 15th place by valuation in world rankings. The share price has seesawed but is back to 767p, although far from the £19 price during takeover fever. After so many fights with suitors over the past decade, the talk is back that Euronext and Deutsche Börse – now eight times the size of London – are eyeing up the LSE again.

Will there be more takeovers, and can London be at the forefront? "Yes and yes," he says. "After the crash there is a greater need for exchanges than ever; they need to be integrated, to have harmonised governance, systems and products so there will be more global alliances. Whether this is through takeover or joint ventures, we will see."

Curriculum Vitae: Xavier Rolet

Born: 12 November 1959, in Aix-les-Bains, France

Married: To Nicole; they have three children.

Forces: Rolet served as a Second Lieutenant and instructor at the French Air Force Academy.

Education: In 1981 attended Columbia University Graduate School of Business, MBA. In 2008 post-graduate of Institut des Hautes Etudes de Defense Nationale, Paris

Career: Worked for Robert Rubin on the International Arbitrage desk at Goldman Sachs in New York in 1984, then as co-head of European Equity Sales and Trading at Goldman Sachs International; moved to London. He joined Credit Suisse First Boston in 1994 as global head of European Equities before moving to Dresdner Kleinwort Benson as global head of risk and trading, and deputy head of Global Equities in 1997. Joined Lehman Brothers in 2000; chief executive officer of Lehman in France from July 2007 to January 2009. Succeeded Clara Furse as chief executive of the London Stock Exchange in May 2009.

Outside interests: Many. Among them, as a member of the Board of Overseers of Columbia Business School; vice-chairman of the World Federation of Exchanges; former chairman of the Strategic Advisory Group of the LSE; former member of the Board of Euronext Paris (Conseil d'Orientation) and Nasdaq Europe.

Hobbies: Bee-keeping, scuba diving, fly fishing, reading, skiing and rally driving (pictured top, and, below with motorcycle and friend – Rolet is on the right). He and his wife run Chêne Bleu, a vineyard in the South of France.

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