PLUS deal positive for ICAP’s OTC strategy

Interdealer broker ICAP’s purchase of the stock exchange assets of UK-based PLUS Markets Group will serve as a hedge against impending OTC derivatives reform.

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Interdealer broker ICAP’s purchase of the stock exchange assets of UK-based PLUS Markets Group will serve as a hedge against impending OTC derivatives reform.

Under the terms of the acquisition, ICAP will buy PLUS-SX, the group’s wholly-owned cash equities recognised investment exchange (RIE) on a cash-free, debt-free basis for a nominal cash amount of £1.

Sources have told that a number of large interdealer brokers were eyeing PLUS-SX, but ICAP was the only eventual bidder.

ICAP said it would use the RIE licence – a UK-only designation managed by the Financial Services Authority – to offer new products and solutions in listed derivatives and would also continue to support PLUS’s UK junior listings market.

In addition to PLUS, the London Stock Exchange, London Metal Exchange and derivatives markets ICE Futures Europe and NYSE Liffe are the only other firms that have an RIE. PLUS has annual revenues of around £3 million but is loss-making, primarily because of an adverse trading environment for SMEs since the financial crisis.

Interdealer broker revenues are under threat from the impending of introduction of new rules for swaps markets that are set to come in at the end of this year. In Europe, central clearing and data collection for OTC derivatives has been enacted through the European market infrastructure directive, while new trading platforms for swaps will by mandated via MiFID II.

Banks that typically hedge or offload their OTC derivatives exposures bilaterally via interdealer brokers like ICAP will soon by required to trade many of these products on exchange and clear them through central counterparties. The PLUS acquisition gives ICAP another tool it can use to diversify revenues following the new swaps trading rules.

“ICAP probably looked at PLUS earlier this year and decided not to make a bid, but have now taken the opportunity to snap it up at a token price,” said Richard Perrott, exchange analyst at private German bank Berenberg.

The interdealer broker already operates 10 multilateral trading facilities (MTFs) covering equities, FX, fixed income and US treasuries among others. But the RIE licence will help ICAP serve a broader range of clients.

The RIE licence is the highest form of regulation for venue operators in the UK and can act as an umbrella for other services. ICAP could use the status to consolidate its MTF licences under a single regime and establish information services based on the data it already collects via its other platforms.

The licence could also attract exchange-traded fund issuers that prefer to list on exchange and help to capture new clients that are only allowed to trade on markets that have RIE status.

Given the greater level of regulatory scrutiny given to RIE licence holders, Perrott believes the acquisition of the platform will facilitate the approval process for further trading venues or products by ICAP.

“A firm does not want to be held up by regulatory delays when trying to launch or list new products as this could have a substantial commercial impact,” he said.

The remaining two parts of PLUS’ business, its DX derivatives market and TS trading solutions division established towards the end of last year with former Chi-X Europe COO Hirander Misra, are still in play.

Sources have claimed that Misra is gearing up to bid for the PLUS-TS subsidiary with a number of members of PLUS Markets’ technology team, although Misra himself declined to comment.

There are further suggestions that Vijay Angelo, a consultant hired by PLUS last year to help develop its derivatives market, is preparing a bid for PLUS-DX with a syndicate that may include the largest players in the interest rate swap market. The market currently offers trading in a contract that replicates US dollar interest rate swap curves via an exchange-traded product based on the FTSE medium-term interest rate swap index series. However, despite receiving approval last July, PLUS-DX is yet to see a trade on its market. A bid for PLUS-DX placed in December last year was rejected by the firm.