Exchange mergers only just beginning

LONDON/WASHINGTON Tue Mar 1, 2011 1:20am EST

A U.S. flag hangs outside the New York Stock Exchange building, February 15, 2011. REUTERS/Joshua Lott

A U.S. flag hangs outside the New York Stock Exchange building, February 15, 2011.

Credit: Reuters/Joshua Lott

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LONDON/WASHINGTON (Reuters) - The mergers of exchanges have only just begun as growing competition and even new regulation drive them closer together, irrespective of national borders.

At the Reuters Future Face of Finance Summit on Monday, top executives said the world's trading platforms and clearinghouses will continue to band together as the wave of consolidation that swelled this month will grow stronger.

A senior U.S. Treasury official, meanwhile, said the planned acquisition of the New York Stock Exchange parent by Germany's Deutsche Boerse AG (DB1Gn.DE) did not pose any immediate national security concerns.

The comments, at the Reuters Summit in London and Washington, suggest the emerging group of trading powerhouses will grow even larger -- and that they will eventually overcome any hurdles to cross-border consolidation of capital markets.

"This is like a game of chess where the first moves will take a while to play out, but there will be further consolidation as exchanges look to build the economies of scale to compete with us on price," said Alasdair Haynes, chief executive of trading platform Chi-X Europe.

In less than three weeks, Deutsche Boerse announced a bid for NYSE Euronext NYX.N, London Stock Exchange (LSE.L) bid for Toronto Stock Exchange parent TMX Group Inc (X.TO) and BATS Global Markets said it would buy fellow privately-owned venue operator Chi-X Europe.

The frenetic 10-day rush revived a consolidation wave that last swept exchanges between 2006 and 2008 and raised some thorny questions over whether politicians and regulators would ultimately block them.

"I don't have any national security concerns on this at the moment," Deputy U.S. Treasury Secretary Neal Wolin said of the deal that would see the Big Board swallowed up for $10.2 billion.

The U.S. Treasury Secretary chairs the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investments to ensure they pose no threat to national security and has the power to block business deals.

Regulators and politicians globally will have to sign off on the array of planned mergers within their boundaries -- including Singapore Exchange's takeover of Australia's ASX Ltd (ASX.AX), announced last year.

"It's evidence again that capital can flow out of this country with a keystroke," said U.S. Congressman Jeb Hensarling, vice chairman of the House Financial Services Committee.

Hensarling warned that the sweeping Dodd-Frank Wall Street reform legislation would hurt the competitiveness of the United States and suggested the bill's over-the-counter swaps reforms could have played a role in NYSE Euronext looking for a merger partner.

Exchanges and clearinghouses figure to benefit as lawmakers and regulators in North America, Europe and Asia drive far more swaps through more transparent operations.

Simon Lewis, chief executive of the Association for Financial Markets in Europe (AFME), said the banking lobby has no issue with the Deutsche Boerse-NYSE Euronext merger, which if allowed to go ahead will have some 90 percent of the European futures market.

Lewis also said AFME has no plans to ask European Union competition authorities for safeguards. Banks, the main users of exchanges, will be looking for lower tariffs, more orderly markets and greater efficiency from mergers, Lewis added.

END GAMES

Haynes said the Swiss and Spanish bourses were potential targets for further exchange deals.

"I don't believe these people in the end can be on their own," Haynes added.

Chi-X Europe has grown in the past three years to become the most successful of the new alternative trading platforms, taking a 16.3 percent shares of the European market from the region's top exchanges, Reuters data shows.

BATS and Chi-X say their tie-up will create a strong, viable trading alternative to Europe's exchanges, which are themselves bulking up.

LSE is Europe's largest group by value of daily trading. Deutsche Boerse is the fourth largest European trading center, while NYSE Euronext is the second-largest.

"In the end we believe there will be four to five global players and we will be one of these global players," said Haynes.

Clearinghouses, which stand between parties to a trade and guarantee their obligations, will be forced to follow suit, said Roger Liddell, CEO of European clearing house LCH.Clearnet.

But he said Europe's clearers will only start to merge once they have had a chance to start competing, which Liddell said will happen in "a few weeks."

"It's been a long time coming, but it will be a game changing event," he said.

LCH.Clearnet and clearing houses SIX X-Clear, EuroCCP and EMCF have been working for two years to convince European regulators to back their plan to link up their clearing systems and start competing.

"We expect to get a green light from regulators to launch our link with X-Clear in two weeks and to start work with EuroCCP and EMCF to launch in just a few weeks from now," said Liddell, signaling broader changes are afoot in the sector.

"We see the world dominated by a smaller number of bigger exchanges, typically competing with us and each other not just in execution, but also in clearing, including OTC derivatives," Liddell said.

Europe's largest trading firms are keen for the clearing providers to link their systems and start competing as they feel competition will drive down the cost of trading.

But European regulators, who initially backed the plan in 2006, slammed on the brakes after the financial crisis, citing fears over increased systemic risk.

(Additional reporting by Huw Jones in London, Ann Saphir, Sarah N. Lynch and David Lawder in Washington; additional writing by Jonathan Spicer; editing by Louise Heavens and Andre Grenon)

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