The proposed merger between the London Stock Exchange Group (LSEG) and TMX, the Canadian exchange operator, will be driven by the prospect of increased revenues from emerging markets in the short to medium term, analysts were told this morning.
In a conference call, LSEG CEO Xavier Rolet identified listings, technology and derivatives as the business areas most likely to deliver the highest revenue synergies in the short term, and confirmed that growth markets will be targeted.
The combined entity's listings business will focus on opportunities in natural resources, energy and mining companies globally, plus small- to medium-sized enterprises in Europe. Both London and Toronto already list non-domestic firms involved in natural resources, many from emerging markets. HRT Participacoes em Petroleo, a Brazilian oil and gas firm, announced in January that it plans to list in Toronto in 2012 in addition to its home listing.
The LSEG/TMX merger envisages cross-listings in London and Toronto as well as a system to facilitate trading across Canadian and European markets in equities, fixed income and derivatives. “We will be able to support trading across every major asset class, and the geographic profile of our revenue will be a balanced mix between North America and Europe,” said Rolet.
Alluding to the dominance of rival exchange operators NYSE Euronext and Nasdaq OMX in the exchange technology space, Rolet declared LSEG-TMX's intention to provide a credible alternative. “Together we can make a powerful third competitor, globally,” he told analysts, predicting that information and technology products would provide 30% of the combined group's revenue. Rolet added that the LSEG's new Millennium Exchange cash equities system and TMX's SOLA derivatives platform would be marketed to exchanges in emerging markets, many of which are in the process of upgrading trading systems and market infrastructures.
The LSEG currently only uses the Millennium Exchange platform for Turquoise, its equities multilateral trading facility, but it plans to roll the platform out onto its main London market on 14 February. Externally, the Johannesburg Stock Exchange plans to use the system from 2012 and the Mongolian Stock Exchange is to adopt it as part of a restructuring that is being overseen by the LSE. Norway's Oslo Børs currently uses the LSE's TradElect system and has not confirmed whether it will migrate to Millennium Exchange.
LSEG-TMX will use both Millennium Exchange and TMX's Quantum platform to support their cash equities in the short term and have not yet agreed a timeframe for system integration. TMX's SOLA derivatives platform – currently used by LSEG's UK-based EDX and Italian IDEM derivatives markets, the Montreal Exchange and Oslo Børs – will also support a new equity derivatives offering from Turquoise.
Adding TMX's derivatives capabilities to LSEG's European operations will allow the combined group to tackle the duopoly of derivatives trading that currently exists in Europe, said Rolet. He said that merged company plans to create an interoperable clearing environment between the two exchanges, in equities and derivatives, which would support transatlantic trading.
LSEG, which acquired Italian central counterparty Cassa di Compensazione e Garanzia and central securities depository Monte Titoli as part of its Borsa Italiana purchase in 2007, put its clearing agreement with incumbent UK provider LCH.Clearnet on hold last year.
The deal, which has already received approval by the LSE's shareholders, but is still to be ratified by TMX's much more diverse base of owners, has revenue targets of Â£35 million (C$56 million) in the third year following the merger, rising to Â£100 million (C$160 million) annual run-rate revenue benefits by year five.