Deutsche Börse hopes that its philosophy has global appeal
While EU and US policy makers press on with reforming markets in the wake of the financial crisis, Deutsche Börse (DB) stands apart.
North Atlantic rivals may have more volume in particular products, but none has the breadth of operations of Europe’s largest infrastructure operator by market capitalisation.
Thanks to long-term planning, its operations have mushroomed in the last 20 years from share trading to derivatives and commodities, and providing IT services and market data.
It has built on extensive post-trade services, such as clearing and settlement, which, while not always attracting much attention, provide a critical market “plumbing” by offsetting systemic risks from trading.
These units account for the majority of profits and create a highly integrated business the group sees as fundamental to a particular strand of capitalism.
Reto Francioni, chief executive, told business leaders and politicians in January: “We share the same basic belief that the market economy also has to fulfil a social obligation, and that the ‘Rhine capitalism’ model of an economy buffered by corporations and focused on the long term, with strictly regulated markets – which are free for that very reason – is fundamentally superior to the Anglo-American capitalism model of deregulation.”
Yet, perhaps surprisingly, few politicians and regulators see the bourse as a role model. Instead, it finds itself facing threats to its status, particularly from Brussels.
The first blow came two years ago, when antitrust officials blocked its planned merger with NYSE Euronext, the transatlantic exchange operator, saying the combination would have created a European monopoly in futures markets. The ruling had two ramifications say senior executives, who maintain it makes further acquisitions in Europe difficult and puts local companies at a disadvantage to US rivals.
Chicago-based CME Group had been allowed by its regulators to pursue a combination that gave it a near-monopoly in interest rate futures in the US. Then, Atlanta-based IntercontinentalExchange (ICE) swooped in to buy NYSE Euronext for $11bn.
As ICE already had extensive London-based operations, this has created a bigger rival to DB’s Eurex derivatives business in the European heartland. CME plans to launch a futures exchange in London in late April.
CME’s divisions will also square up in two of Eurex’s new developments, foreign exchange futures trading and over-the-counter (OTC) swaps clearing.
For all three, the goal is to persuade investors to process more of their derivatives trades through their clearing houses, allowing customers to save on margin by netting out positions.
Post-crisis, global regulators have sought to underpin financial markets by pushing more of the over-the-counter market through these risk managers, which guarantee a trade in the event of a counterparty default.
But it is unclear how profitable this business could be, with regulators keen to avoid clearing houses competing by cutting prices or skimping on risk management processes.
In February, Morgan Stanley said the market for OTC clearing in Europe could be worth an extra €160m in revenues.
Even if Deutsche Börse won a quarter of this market, it would accrue only €40m in revenues, about 2 per cent of its group total, the bank said.
Another threat comes from Europe’s review of its key markets legislation, the Markets in Financial Instruments Directive. Known as Mifid II, it seeks to introduce competition in futures trading, clearing and ownership of market indices.
Taken together, these moves could force open what is known as the “vertical silo” of integrated business that has played an important part in Deutsche Börse’s growth.
But the rules are unlikely to come into force until 2019 and DB executives expect to win as much in new business as they lose in old.
A European financial transactions tax, as pursued by its own government, may also hit profits.
Faced with potential threats in its backyard, it is exploring new products and markets, such as corporate bond trading and interest rate swap futures. Central to its long-term vision is Asia, mirroring the trade flows between China and Germany.
Europe’s largest economy is the biggest recipient of Chinese investment in the region. Germany took in €1.27bn in the first nine months of 2013, according to A Capital, a private equity group.
Deutsche Börse has also bought a stake in the Taiwan Futures Exchange and will open a derivatives clearing house in Singapore.
More than that, it hopes that its philosophy of a capitalism based on long-term careful planning will find a more receptive audience worldwide.
In another notable win, Deutsche Börse beat the London Stock Exchange Group and Nasdaq OMX of the US to supply the technology to upgrade the Bombay Stock Exchange’s platforms. The Börse offered its code as open source software, which allows the BSE to tweak its technology to meet regulatory changes.
“For me it is the correct way to look at the world,” says Ashishkumar Chauhan, chief executive of the BSE. “We are not customers, we are partners.”
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