February 27, 2013 6:42 pm

LSE and TMX agree bond indexing deal

Two of the world’s largest stock exchange operators have agreed to combine their fixed income indexing businesses in a deal that will strengthen their presence in bond markets.

FTSE Group, part of the London Stock Exchange, and TMX Group, the Canadian exchange operator, have joined their fixed income index operations together as a new joint venture to be known as FTSE TMX Debt Capital Markets.

The business, which will be jointly headquartered in London and Toronto, had combined pro forma revenues of £13.7m (C$21.3m) in 2012.

FTSE will own a 75 per cent majority stake in the joint venture, with TMX Group holding a 25 per cent stake.

TMX is receiving £72.2m (C$112.2m) from the London Stock Exchange as part of the agreement and the deal is expected to be slightly dilutive to the Canadian exchange operator’s earnings in 2013.

The indices of the new partnership are used as benchmarks for more than £640bn (C$1tn) in fixed income assets and it will be the third largest provider of fixed income indices to the exchange traded funds industry.

Inflows into fixed income ETFs have been growing rapidly in recent years and on-exchange trading volumes for these instruments have also been rising quickly.

Fixed income ETFs gathered net new inflows of $62.9bn last year, an increase of 38.5 per cent on 2011, according to ETFGI, a consultancy that analyses ETF industry trends.

On the London Stock Exchange, trading volumes for fixed income ETFs rose strongly last year even though overall ETF trading dipped slightly.

The number of fixed income ETF trades on the LSE rose 34 per cent to 240,000 in 2012 while the value of fixed income ETF trading surged 61 per cent to £34bn.

“The fixed income market represents a significant growth opportunity for FTSE, said Mark Makepeace, chief executive of FTSE and director of information services for the LSE.

Fixed income markets, said Mr Makepeace, were undergoing a period of change with investors demanding greater pricing transparency and regulators pressing for more trading to move on to exchanges such as the LSE.

The new joint venture will look to accelerate product development and to bring in other smaller players.

Mr Makepeace said the new group had the critical mass to challenge the two largest players in the fixed income indexing market, Barclays and Markit.

“In partnering with TMX Datalinx, we can quickly create the scale, quality of operation and global distribution necessary to be a significant player in this rapidly evolving part of the indexing industry,” said Mr Makepeace.

FTSE has identified north America as a key growth market and it will establish an office in Toronto as part of its drive to expand its operations in the region.

Last year, Vanguard, the $2tn US mutual fund group, announced that it was switching six index funds with assets of $170bn from MSCI to FTSE from January.

Mr Makepeace said Vanguard’s switch was a “huge endorsement” which had encouraged other asset managers and pension funds to follow its lead in adopting FTSE indices as benchmarks for their funds.

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