London and Frankfurt tie the knot in first wave of mergers
Madrid and Milan stock exchanges invited to join London-based iX as equity partners
The London and Frankfurt stock exchanges yesterday unveiled their long-awaited merger and immediately invited other exchanges to join their planned pan-European stock market.
The combined company, which received a positive response from politicians and most investors, will be called iX and be based in London but with substantial operations in Frankfurt. It will be 50:50 owned by the London and Frankfurt exchanges, although there will be provision from day one for other exchanges to join as equity partners.
The exchanges revealed plans for a joint venture with Nasdaq, the US high-tech market and said they had signed memoranda of understanding with two further European exchanges - Madrid and Milan - to join the "second wave" of consolidation which will follow as soon as the London-Frankfurt deal is bedded down.
Don Cruickshank, LSE chairman and iX chairman designate made it clear that in the view of both exchanges yesterday's deal was just the first stage in a wider consolidation process to create a truly global exchange.
"IX will be the leading exchange in Europe," he said. "This is major step towards an integrated pan-European market. One of the first discussions I look forward to having will be with Brian Williamson of Liffe [the London derivatives exchange]."
He also plans to talk to Euronext, the smaller European grouping whose three-way merger between Paris, Amsterdam, and Brussels in March stung London and Frankfurt into action last month.
Mr Williamson, the Liffe chairman said that he was not convinced that Liffe needed to throw in its lot with iX at this stage: "From the point of view of the cash equity market, it is about time this happened. Indeed I don't know why it did not happen some time ago. But derivatives is a very different world."
The new market will account for 53 per cent of European equity trading, 81 per cent of trading in tech stocks, and 56 per cent of derivatives trading.
Werner Seifert, chief executive of Deutsche Borse, and chief executive designate of iX, insisted yesterday's deal should not be seen in the context of any battle between rival financial centres but in terms of what the exchanges customers' want. "What belongs together finally comes together." He added: "We should drop the London-Frankfurt perspective. We are talking about the building of a truly European exchange. This is a service to investors rather than something an individual city or country should possess."
Mr Cruickshank and Mr Seifert both paid tribute to Gavin Casey, the LSE chief executive who will leave after the merger goes through.
Most of the details have been well trailed. The key elements of the link-up are:
the creation of a new blue-chip market in London under UK regulation comprising the top 300 stocks.
the creation with Nasdaq of a new tech market Nasdaq-iX based in London but operated out of Frankfurt and regulated by the German authorities. The new market will incorporate both Neuer Market and TechMark stocks.
Xetra, Frankfurt's cheap dealing system will become the common technology platform for all the cash markets. It will be operated out of Frankfurt but with proper IT support functions in London. It will also be rebranded.
iX will include Eurex, the German-Swiss derivatives market but not the German exchange's 50 per cent stake in Clearstream, the clearing and settlement operation.
shares will be quoted in either sterling or euros, but the market may switch to euro-only trading if demanded by customers.
It is intended to complete the merger by autumn and have the new markets up and running next spring. Among issues yet to be clarified are the timing of the float; the size of cost savings and the board's composition.
Clearing operations will continue to be provided by both Clearstream in Germany and CrestCo in the UK. However, Dr Seifert said that he hoped that the merger would spur the clearing houses into accelerating the process of consolidation.
Yesterday's announcement was immediately hailed by both politicians and the market as a major step forward.
Downing Street said it should help cut the cost of capital and would be good for the City. "It's something we welcome." a spokesman for Prime Minister Tony Blair said. "The implications of this merger for the City of London are extremely positive."
However there was some concern about the impact on retail investors and the fact that clearing, which is one of the key elements of the cost burden on users, is not included in the deal.
The fact that many details are still very hazy also gave rise to concern that this deal, like the previous one struck by London and Frankfurt in 1998, would run into the sand when many of the points, glossed over in the rush to get a deal, have to be clarified in the implementation stage.
There was concern among small investors that their interests were being sacrificed to meet the demands of the big global institutions who already had alternatives to the conventional exchanges.
Angela Knight, chief executive of the Association of Private Clients (APCIMS) expressed fears that private investors would foot the bill for the switching to Frankfurt's Xetra platform. The switch to SETS is said to have cost London firms £1bn although LSE officials insisted yesterday that the sums envisaged would be on nothing like the same scale.
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