The London Stock Exchange is making a fresh attempt to break into the vastly lucrative market in derivatives dealing that is controlled by two exchanges — one American, and one German.
The LSE has set up a new venture, CurveGlobal, in conjunction with six “bulge bracket” banks and the Chicago Board Options Exchange.
The venture will start trading in the first quarter of next year, initially offering interest-rate contracts. These are among the most widely used derivatives and are utilised to hedge against future movements in bank rates.
The London exchange already has its own derivatives trading platform, offering options on future movements in the FTSE 100 and in some Russian equities. The service has yet to gain much of a market share.
Instead, the leaders in the multitrillion global derivatives market are Eurex, which is based in Frankfurt, and Liffe, the London financial futures market, owned by IntercontinentalExchange, of the United States.
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In 2001 the LSE tried to buy Liffe but was thwarted by a higher offer from Euronext, the continental exchanges operator, which subsequently was subsumed into ICE. Some believe that the loss of Liffe was a crucial blow, the LSE then becoming subject to a series of unwanted bid approaches of its own.
Xavier Rolet, the LSE’s chief executive, said that the new venture was “an exciting and innovative initiative”. The exchange believes that it will succeed in drawing trade away from the two incumbents, where other attempts have failed, because it has the backing of the six investment banks. The LSE has 31.7 per cent of the shares, having invested £9.5 million.
The six banks — Bank of America Merrill Lynch, Barclays, Citi, Goldman Sachs, JP Morgan and Société Générale — along with the Chicago exchange, own the rest, although the intention is for the LSE to reduce its holding to 25 per cent by bringing in more participants.
The banks have a vested interest in driving business to the new venture, which will use the LSE’s existing derivatives platform. In addition, it will use LCH.Clearnet for clearing trades, which will allow more efficient use of participants’ collateral and make trading cheaper. Clearing takes up a significant portion of the cost of dealing in derivatives.
Michael Davie, the chief operating officer of LCH, took over as chairman of CurveGlobal with immediate effect yesterday.
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Although the market generally welcomed the move, analysts at Keefe, Bruyette & Woods said: “We think the venture will generally be fighting an uphill battle, given the difficulty historically to take share from incumbent futures venues.”