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Was this the starting of the firing gun in a scramble for assets in emerging markets?
The comments by Reto Francioni, chief executive of Deutsche Börse, that Asia and Latin America were the loci of “the crucial growth in our markets”, coupled with his observations about industry consolidation and blunt message to regulators hinted that the exchange had thought deeply about its next move.
Assuming it gets regulatory and shareholder approval, the new US group will create a serious competitor to Eurex for trading interest rate derivatives in Europe.
Deutsche Börse’s turn towards Asia and Latin America also reflects limited choices elsewhere. Its US options trading subsidiary, the International Securities Exchange, is growing but to date hasn’t been worth the $2.8bn it paid for it. A deeper push into the US would bump up against ICE and CME in their home territory.
And, according to other media reports, it has little interest in buying the rump of Euronext, which mainly comprises the stock exchanges of Paris, Amsterdam, Lisbon and Brussels, as well as some small options trading venues.
While it has long appreciated the importance of trading derivatives, it was blocked by regulators. Unsurprisingly, a Euronext shorn of Liffe holds little appetite.
That’s not to say it has been cowed by authorities. Mr Francioni’s comments seemed to indicate future regulatory battles would have to be fought but only on what he saw as key long-term issues. European exchanges didn’t appear to fit that category.
However, Asia certainly does although its operations to date have largely been unobtrusive to the wider world. It owns a 5 per cent stake in the Bombay Stock Exchange and has a licensing agreement with the ISE for more derivative contracts. It has just begun a venture with SGX, the Singapore exchange, to open access to each other’s market data in their respective data centres.
Mr Francioni cited the creation of the Japan Exchange Group and the joint venture between the stock exchanges of Hong Kong, Shenzhen and Shanghai, indicating his view was far broader and deeper.
But in spite of his comments about observers in Frankfurt and Europe, any future plans will also depend on the attitude adopted by local regulators.
In the only significant test to date, the bid by SGX for Australia’s ASX two years ago was blocked by regulators on the grounds that it could undermine the stability of Australia’s financial system. At the time, Canberra cited the “critically important” clearing and settlement functions operated by the Australian Securities Exchange.
Shortly afterwards, DB’s settlement and custody arm Clearstream stepped in with a system that sidestepped the issue by offering collateral outsourcing that kept assets under local authority jurisdiction.
But as the debate over both the SGX offer and high-frequency trading showed, market structure issues can become highly politicised. Whether the type of neat solution Clearstream provided to a national exchange would translate into a wider mainstream debate is another matter.
That’s not to say Asian regulators are any further behind the curve than counterparts in the US or Europe. Many make carefully considered arguments about the trade-off between commercial opportunity, public utility and management of systemic risk. And as the letter to the Commodity Futures Trading Commission last year showed, they are not slow to assess the potential long-term impact on major overseas legislation like the Dodd-Frank act.
But SGX apart, they have yet to be tested with a full-blown takeover approach. Given that Asia is generally further behind the US and Europe in its reform of the derivatives market, a national regulator may find itself in a similar position to that of the European Commission a year ago. While one branch of government is examining competition issues, another is trying to define future policy on competition.
The reaction from the unlucky regulator put in that position may prove to be one of the year’s main issues.
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