Liffe-Euronext split timetable could be too ambitious

IntercontinentalExchange’s plans to IPO Euronext in the middle of next year could be hampered by the regulatory process, according to exchange experts.

IntercontinentalExchange’s (ICE) plans to IPO Euronext in the middle of next year could be hampered by the regulatory process, according to exchange experts.

Last week, ICE completed its acquisition of NYSE Euronext. While ICE is to keep ahold of the iconic New York Stock Exchange and London derivatives market Liffe, the acquisition will require it to sell off Euronext - which runs primary exchanges in France, Portugal, the Netherlands and Belgium - to satisfy competition rules.

In a financial update earlier this week, ICE said it would need to split Liffe from Euronext, both of which are regulated together as a single entity, before being able to list the Euronext portion.

“There is no possibility of moving forward with an independent Euronext or its IPO until this work is completed given the range of corporate structuring, governance and technology requirements for this new firm,” said Jeffrey Sprecher, chief executive of ICE, in a phone call to analysts this week.

ICE is confident it can complete the separation in the first half of 2014 and said it has detailed plans in place.

However, sources familiar with the regulatory process told that the timeline is overly ambitious.

Among the major issues ICE faces are the various differing demands of national regulators. With Euronext owning the primary stock exchanges in four countries, it is likely that each regulator will examine the deal with particularly close scrutiny given the political implications of the business.

There may also be concerns regarding the business’ viability as it could lose out on many of the benefits of scale that come from being part of a larger group. The loss of shared functions in technology, clearing, administration and infrastructure could be detrimental to Euronext, and regulators will be keen to ensure that the split does not impact service levels.

For example, Euronext currently runs on a platform supplied by NYSE Technologies and would either be required to switch its technology or reach an agreement to be supplied by its former parent.

However, one option to speed up the sale of Euronext could be to arrange outsourcing agreements with NYSE Liffe where services are shared between the business.

“The regulators will let you outsource a surprising number of services, so a standalone Euronext could in theory set up quickly by outsourcing customer management, post-trade, monitoring, data services, and so on to Liffe,” said one market structure expert.  “That might even be positively attractive for a potential trade buyer as those services wouldn't then need to be laid off.  But it's less compelling for a genuine IPO because the operating costs are higher and don't scale.”

There are also questions around the need for non-competing agreements between the two businesses. With competition heating up in the European derivatives market, ICE may look to seek an agreement with Euronext to ensure it does not immediately launch a London derivatives market that competed directly against it.

ICE declined to comment on its plans regarding competitive agreements with Euronext and said it has been in talks with regulators to ensure a smooth separation of Liffe and Euronext.