Margareta Pagano: Can London still get some Liffe out of ICE?
The LSE made a huge mistake by not buying the futures exchange but can salvage something by grabbing European assets, such as the Paris bourse
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 23 December 2012
One of the great tragedies in the history of the London Stock Exchange was its failure to buy Liffe more than a decade ago. It was an enormous strategic error, which allowed it to be trumped by its French competitor, Euronext. Creating what was then being called the London solution, putting together the LSE's cash markets and Liffe's futures market, was seen by everybody as no-brainer; a jewel not be missed.
But in typical British laissez-faire fashion we let the jewel in the crown slip out of our hands when Euronext, run by the wily Jean-Francois Theodore, outwitted the LSE, offering around £550m for the futures exchange.
In another smart move, the Frenchman went on to merge his European exchanges with New York's oldest trading floor, the NYSE, to become NYSE Euronext, clumsy in name as well as management.
What was so particularly galling was that Mr Theodore's trumping of the LSE was by the tiniest of margins. It's looks all the tinier today, and LSE shareholders can be excused for feeling miffed, when you see the fabulous $8.5bn (£5.2bn) price that the US market, the IntercontinentalExchange, is paying to merge with NYSE Euronext.
It's a spectacular gamble by ICE, which has grown like topsy since Jeff Sprecher launched the energy and commodities exchange a little more than decade ago in Atlanta. And why is Mr Sprecher paying so much? He wants Liffe, which accounts for about 40 per cent of the NYSE's profits, and is worth about half the bid price, putting a value of about $4bn on the London-based futures market. Not a bad increase over a decade in which Liffe has become Europe's second-biggest derivatives exchange after Germany's Eurex market and a fierce rival to the Chicago mercantile exchange.
Mr Sprecher wants Liffe because derivatives trading and clearing are where the money is being made. As regulators push more of the over-the -counter market onto exchanges, ICE wants to be there. It's already one of the biggest US commodities exchanges and is the largest for Brent crude oil and natural gas after buying International Petroleum Exchange a few years ago; another lost deal for London.
What Mr Sprecher doesn't want, however, are the European exchanges that come with the deal – Paris, Amsterdam, Lisbon and Brussels – and he has said he will float or sell them once the merger is complete. One natural owner could be our own Xavier Rolet, the LSE's chief executive, who is close to completing the LCH merger and must be on the lookout for his next deal.
Buying such a ragbag of exchanges may not be as sexy as buying Liffe but putting them together with London, which is still the best cash market in the world, would help drive down costs and bring scale. Having London as their home exchange would also provide European companies with a much deeper and richer market for raising capital than they are being offered; it's no secret Euronext has been unhappy under the NYSE.
The timing is good too. If the eurozone economies do pick up, which is likely, then it won't be long before its corporates are out on the prowl again for new opportunities. Together Europe's companies, including the UK, have about a €1trn (£814bn) sitting idle in their banks. Of course the French won't like it if London were to buy the Paris bourse. But it would be difficult for them to argue since they bought Liffe from us and would show how European we are in outlook: after all the LSE already owns Borsa Italiana. Having Mr Rolet, who is French, leading the charge might make it less painful. And it would be the most delicious tit for tat for having lost Liffe.
Osborne should stop sitting on the fence with banking reforms
Oh dear, Andrew Tyrie has delivered such a bombshell with his damning report into banking reform that poor George Osborne must have been hoping for a moment on Friday that the Mayans were right about the world ending. Well, the world has survived but you do wonder if the government's banking reforms can survive as well.
For the report from the Parliamentary Commission on Banking Standards, chaired by Mr Tyrie, claims the proposed Vickers reforms fall well short of what is needed to restore banking and banking standards. They endorse the central tenet of Vickers, that universal banks should be allowed to ring-fence their retail operations from those in the investment bank, but Mr Tyrie and his team of 10 MPs and peers, want the fences to be electric. To do this, they say give the Bank of England's new regulator, the Prudential Regulation Authority, the reserve power to force the total separation of retail and investment banking businesses if a bank doesn't behave itself properly. And, if banking chiefs fail to do so, they should be prosecuted.
It's certainly a big advance on Vickers but you do have to ask whether all this messing around with fences isn't just the most elaborate conceit. As I've argued forever, the simplest solution is to make a clean split. It goes without saying that splitting retail and investment banking isn't the panacea to all that has gone wrong but it's a starting point and has the merit of being simple too: bright people are always going to run rings around fences whatever they are made of. As Jon Moulton, the venture capitalist, said, putting up an electric fence is like trying to control POWs in Colditz: "Why bother – it's going to be futile."
However, Mr Tyrie's proposals do go a long way to make banks a little safer. They will be hard for Mr Osborne to resist; one of the peers on the commission is the future Archbishop of Canterbury, Justin Welby, who played an influential role in formulating the proposals. Bishop Welby has clear views on bankers: he once likened the crash to the bombing of Coventry cathedral. His curse could prove more potent than that of the Mayans.
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